Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is Wal-Mart too Dependent on Food Stamps?

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.

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.

Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2014, at 5:37 PM, DoctorLewis4 wrote:

    Not to mention the full time Wal Mart employees who use food stamps because the company does not pay them a living wage.

  • Report this Comment On February 11, 2014, at 1:20 AM, stackman wrote:

    Can I ask a stupid question Motley Fool? Did an editor read this at all? How did this slip through: "Today there are 47 million people on SNAP -- that's roughly 1 in every 6 Americans. The average monthly household benefit was $278 last year and there were over 223 million households on the program."

    There were more households than people on the program? There are 317 million people in the USA and 223 million households households were on the program????? Astounding journalism.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2831377, ~/Articles/ArticleHandler.aspx, 9/3/2015 7:48:16 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Celan Bryant

Celan follows the energy and retail sector. When she isn't reading a 10K, she's watching Ancient Aliens or playing with her dogs. @celanbryant on Twitter.

Today's Market

updated Moments ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:01 PM
BIG $46.43 Down -0.65 -1.38%
Big Lots CAPS Rating: ***
DLTR $67.00 Down -0.59 -0.87%
Dollar Tree Stores CAPS Rating: ***
KRFT $0.00 Down +0.00 +0.00%
Kraft Foods, Inc. CAPS Rating: ****
WMT $64.86 Up +0.42 +0.65%
Wal-Mart Stores CAPS Rating: ***