Walmart discovers the payroll tax may bite

Jim Burress Feb 20, 2013

Walmart discovers the payroll tax may bite

Jim Burress Feb 20, 2013

On Thursday, Walmart releases its fourth quarter earnings. We’ll find out how well the nation’s largest retailer did during the holiday shopping season.

Expectations are those earnings will be slightly better than a year ago. But Walmart’s next quarter isn’t shaping up to be as good.

According to an internal memo quoted by Bloomberg News,  one company executive says sales during the first two weeks of February were the worst he’s seen in his seven years with the retailer.

Walmart is pointing the finger at the 2 percent Social Security payroll tax increase that went into effect Jan. 1st. But is that really what’s driving down profits?

For Kay Jakes, it’s as good of a reason as any.

“A couple of dollars here and there, you know, it does add up,” she says in the parking lot of an Atlanta Walmart.

Jakes’ shopping cart is a bit emptier because her paycheck is a bit smaller, and that means her shopping trips lately have been a bit leaner.

“What you’re buying may be less than, perhaps, what you came in for; so there is some type of effect,” she says.

For the average consumer, the return of the 2 percent Social Security payroll tax eats up about $15 a week or so.

But analyst Patrick McKeever, who follows Walmart for MKM Partners, says the payroll tax increase is just one of several factors that play into retail spending.

“It’s still early to make the call, but it does seem to be having some impact,” he says. “But for lower income consumers, it’s more of a negative than for middle and upper income consumers.”

And guess where a lot of lower income consumers shop?

Still, part of Walmart’s poor start could actually be because the economy is getting better. Charlie O’Shea, a senior analyst at Moody’s, says we could be seeing a reversal of what’s known as the “trade down” effect.

“Someone shops at store A, and now that they’re making less money, they’re shopping at store B,” he says. “And we saw a lot of that during the recession when Walmart picked up a lot of sales.”

O’Shea believes a good number of consumers who traded down to Walmart in recent years are now returning to store A.*

*CORRECTION: The original version of this story incorrectly attributed an assessment of Walmart’s future profitability to Moody’s senior analyst Charlie O’Shea. The text has been corrected. 


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