If The Economy Is Improving, Why Are These Retailers Failing?

Wal-Mart (NYSE: WMT  ) , Macy's (NYSE: M  ) , J.C. Penney (NYSE: JCP  ) , and Kohl's (NYSE: KSS  ) all stressed one underlying aspect when they reported quarterly results recently: lower to middle-income Americans are holding onto the money they have, which will have implications across the retail industry.

The Results Are In

Over the past week four of the largest retailers in the world reported their second-quarter financial results. The highlights for each company were:

Wal-Mart:

  • Revenue: $116.2 billion vs. $118.47 expected
  • EPS: $1.25 per share, in-line with expectations
  • U.S. same stores sales fell 0.3% in the second quarter, compared to an expected 1% gain
  • Cut revenue and profit forecasts for its fiscal year

Macy's:

  • Revenue: $6.07 billion vs. $6.26 billion expected
  • EPS: $0.72 per share vs. $0.79 analyst expectation
  • Comparable sales slid 0.8% in the second quarter, compared to an expected 2.3% gain
  • Lowered full year 2013 EPS forecast

J.C. Penney:

  • Revenue: $2.66 billion vs. $2.76 billion expected
  • EPS: -$1.17 per share, excluding items vs. -$1.06 per share analyst expectation
  • Same store sales fell 11.9% in the second quarter, compared to an expected 7.4% drop

Kohl's:

  • Revenue: $4.29 billion, in-line with expectations
  • EPS: $1.04 per share, in-line with expectations
  • Same store sales rose 0.9%, compared to an expected 1.1% rise in the second quarter

Looking Past the Numbers

Throughout all four reports a consistent theme emerged. A weak overall performance for each of the companies was characterized by disappointment in revenue and EPS, lackluster same-store sales, and downbeat guidance. What is to blame for this broad industry-wide disappointment?

Industry analyst say to look no further than lower to middle-income Americans rolling back spending. Following Wal-Mart['s earnings report, Susquehanna Financial Group analyst Bob Summers noted, "the demographic that they (Wal-Mart) cater to, not only has it not seen improvement, I would argue that things have gotten worse."

Analysts cite higher payroll taxes, expensive gasoline prices, and a slow jobs market contributing to the stress being felt by consumers.

The particular weakness being felt in the lower to middle-income sectors is apparent in Macy's results. In the company's namesake mid-tier stores, Macy's reported the first decline in same-store sales in nearly 4 years. This comes in stark contrast to the strong results post by Macy's upscale Bloomingdale's segment.

Will This Weakness Persist?

A telling metric for the low to middle-income consumer is the number of Americans receiving food aid. At last count in May, 47.6 million Americans received food aid, which is 1.1 million more than a year earlier. and 7 million more than in 2010. This deterioration has occurred even as unemployment has dropped from roughly 10% in 2010 to 7.4% currently.

Furthermore, real wages have stagnated, falling 0.1% between June 2012 and June 2013, according to the U.S. Bureau of Labor Statistics. "Workers are not doing well," says Elizabeth Ashack, an economist at the Bureau of Labor Statistics  "They're losing ground because wages are not growing in real terms."

Wal-Mart CFO Charles Holley stated, "The consumer doesn't quite have the discretionary income, or they're hesitant to spend what they do have."

Is this troubling trend going to continue into the future?

Macy's CEO Terry Lundgren said he is "encouraged" so far with the back-to-school season, which will act as a barometer to the all-important holiday season.

On the other end of the spectrum, Wal-Mart expects little improvement going into the fall, forecasting flat U.S. same-store sales for its current quarter.

While projections vary between different analysts and companies, one outcome that is seen as highly unlikely is a strong revival of the low to middle-income consumer. The higher payroll tax is not likely to go away anytime soon, and the overall economy remains stubbornly slow in its recovery. At least in the near future, consumers are likely to only spend on essentials. "The U.S. consumer is weary in this turnaround. It has been quite anemic, relatively speaking. I think many of them just don't see it on Main Street," said Eric Beder at Brean Capital LLC.

The Foolish Bottom Line

Even as the overall U.S. economy has appeared to be improving, low to middle-income Amercians have continued to feel pressure when it comes to discretionary spending. This trend has been confirmed by the financial results of 4 of the largest retailers in the world. 

This trend of stagnating spending is likely to continue, but a sliver of hope is still held in the back-to-school season outperforming. Innovative company strategies may help out individual players in the industry. Overall, Macy's is the best positioned, as its Bloomingdale's segment exposes the company to the prospering high-end consumer. However, all names are likely to be dragged lower by declines in the retail industry.

Investors should watch consumer spending and confidence levels for a read on the health of the consumer, as well as track the number of Americans received food aid for a more accurate representation of the health of the low to middle-income American. 

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