Is Wal-Mart too Dependent on Food Stamps?

On Jan. 31 Wal-Mart warned investors that its earnings will be on the lower end of previous guidance due to government cuts in food stamp benefits. The Farm Bill just cut another $8 billion from food stamps -- what affect will this have on Wal-Mart's earnings in 2014?

Feb 9, 2014 at 2:41PM

According to the Wall Street Journal, Americans spend 18% of all food stamp dollars at Wal-Mart Stores (NYSE:WMT), which is about $14 billion. With the recent cuts to the Supplemental Nutrition Assistance Program, or SNAP, no wonder Wal-Mart is steering its previous earnings guidance down. On Jan. 31 the company explained that its earnings would be on the low end of previous guidance due to cuts in food stamp benefits that started in November. To make matters worse, on Feb. 4 the Senate passed the Farm Bill, which approved another $8 billion in SNAP reductions.

A brief history of food stamps
America's first Food Stamp Program, or FSP, started in 1939 with the issuance of orange stamps. At that time, peak participation in the program was 4 million at a cost of $262 million. In 2008, the food stamp program changed its name to the Supplemental Nutrition Assistance Program. Today there are 47 million people on SNAP -- that's roughly 1 in every 6 Americans. The average monthly household benefit was $274 last year and there were over 23 million households on the program.

As food stamp usage increased over the years, more discount retailers started taking market share away from grocery stores. In November cuts were made to SNAP, and Wal-Mart blames its current woes on these cuts. The chart below provides an overview of the monthly dollar value of these cuts for the average household.

Cms

The effect of SNAP cuts on retail
Wal-Mart isn't the only retailer that will be affected by cuts to the nation's food stamp program. Dollar Tree Stores (NASDAQ:DLTR) attributes its growth to the increase in the number of its stores that can accept food stamps. As the company explained in its latest earnings report:

We accept food stamps (under the Supplemental Nutrition Assistance Program ("SNAP")) in approximately 4,560 qualified stores compared to approximately 4,150 stores at October 27, 2012. SNAP benefits will be lower for recipients after November 1, 2013; however, we do not expect the effect on our sales to be material.

We'll see if that expectation holds up on the next earnings call.

The CEO of Kraft Foods opposes cuts to food stamp programs and referred to food stamp users as "a big part of our audience." 

"There's no debating that a growing percentage of the consumer base is economically stressed and becoming more dependent on the government assistance," said the CEO of Big Lots (NYSE:BIG) on the second quarter earnings call in 2012. "In each of the last two years over 6 million Americans have been added to snap (the Federal Food Stamps Program) resulting in the neighborhood of 15 percent or more of our total population being enrolled in this program."

Clearly food stamps are a huge revenue source for the retail industry, and as the largest discount retailer in the world it's not surprising that Wal-Mart is affected by cuts in the SNAP budget. Other issues could also challenge Wal-Mart's earnings.

A challenging earnings season
Wal-Mart missed on earnings in the first half of 2013. In the third quarter, the company beat estimates by $0.01 per share and adjusted its fourth-quarter estimate upward by $0.10 per share. It was hard to understand where this lift was going to come from, especially given the company's track record in 2013. In fact, Wal-Mart went into detail about the dilutive effects of its decisions to close 50 under-performing stores in Brazil and China and terminate a franchise agreement with Bharti Retail. Wal-Mart estimated these events would dilute earnings by $0.10 per share. It gets worse.

In addition to these two events, there are three other issues for Wal-Mart that could potentially hurt earnings: declining same-store sales, operating inefficiencies, and the legal ramifications that go along with allegations of international bribery.

Same-store sales declined by (0.2)% in the third quarter. Wal-Mart blamed the decline on, "lower consumer spending primarily due to the slow recovery in general economic conditions, and the 2% increase in the 2013 payroll tax rate."

Another trend for Wal-Mart is rising operating expenses, which are outpacing sales by 2.2%. Without an explanation of why this occurred, there's no reason to think that this decline won't continue into the fourth quarter.

Wal-Mart's third issue is the FCPA, or the Foreign Corrupt Protection Act. The U.S. government alleges that Wal-Mart used bribery in order to secure operations in Mexico, China, India, and Brazil. In addition to the costs associated with litigation, the company must also spend money on compliance training and internal investigations.

With so many issues affecting the company, it's hard to understand how the CFO had the confidence to announce that earnings would increase for the fourth quarter.

The Foolish bottom line
Even without cuts in food stamp benefits Wal-Mart came into the fourth quarter with declining same-store sales, increasing operating costs, and litigation on top of litigation. In November, the CFO increased guidance for the fourth quarter by $0.10 and then on Jan. 31 he warned investors that earnings were going to be on the lower end of that guidance due to cuts in food stamp benefits that will continue into 2014. No matter what, Wal-Mart has a challenging year ahead and I'm guessing that its earnings will come in well under guidance. We'll have to wait until Feb. 20 to see just how bad things really are.

As Wal-Mart falls, who rises?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Note: A previous version of this article misstated the number of households participating in the Supplemental Nutrition Assistance Program last year. The Fool apologizes for the error.

C Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers