December 22, 2003

Oh Cr**!

The Wal-Mart indicator is not very happy:

FT.com Home US: Wal-Mart warned on Monday that sales were still tracking at the low end of its target range for December, in the latest sign that holiday retail sales in the US could be lacklustre. Forecasters and retailers had been looking for a sharp rebound in sales from last Christmas, when, by some measures, sales growth was the slowest for 30 years.

The National Retail Federation, the industry lobby group, forecast total holiday sales would increase 5.7 per cent, year on year - the strongest increase since 1999 - compared with only a 2.2 per cent gain last year. It said on Monday it was sticking to its forecast. But Wal-Mart, the world's biggest retailer, which accounts for about 8 per cent of non-automotive retail sales in the US, warned for the second week running that sales from stores open at least a year were still towards the low end of its 3-5 per cent projected range. As in the previous week, it said fewer people visited its stores than in the same week last year, although average purchase sizes were up....

Posted by DeLong at December 22, 2003 05:27 PM | TrackBack

Comments

This is great news. It means the economy is doing so great that people no longer feel the need to shop at low class places like Walmart.

Posted by: NRO Hack on December 22, 2003 06:15 PM

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How does this news jibe with the fact that Visa sales are up 13.1% for the holiday season compared to last year through December 14th.
Also, does the greater use of giftcards have some sort of delayed impact in consumer spending? I read that gift card sales are running as high as 10% of sales as well. How does this data jibe with the Walmart news. Perhaps walmart data is a little overanalyed. Or maybe not, we will soon find out. Bets are being taken on the retail holders for all those willing.

Posted by: William on December 22, 2003 06:39 PM

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William writes:
>
> How does this news jibe with the fact that Visa sales are
> up 13.1% for the holiday season compared to last year
> through December 14th.

Things are still unclear, I'll grant you. But the one sales category that is (again) decisively up this year is on-line sales, and those extremely likely to be put on your credit card. In addition, many websites had fairly conservative shipping dates for guaranteed Christmas arrival, so this measure might be a bit "front-loaded" this year compared to previous years.

Which isn't to say that Christmas sales still might be up at places other than Wal-Mart; the season looks to be pretty robust in my small city. But you would probably predict a nice gain on the Visa front in most scenarios.

Posted by: Jonathan King on December 22, 2003 07:00 PM

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"sales from stores open at least a year were still towards the low end of its 3-5 per cent projected range."

But Wal-Mart has stores that have been open less than a year also, so the actual increase in Wal-Mart's sales is greater than this figure. I don't think it's reasonable to assume that the new stores' sales are just taken away from existing non-Wal-Mart stores, so the new stores too represent an increase in total retail sales. In other words, if there were 100 stores in the world last year, and there are 110 this year, retail sales growth is not the growth in the 100 stores, but rather that growth plus the sales in the ten new stores.

Same-store sales growth is useful for evaluating a company's performance, but has problems when considered representative of the entire economy.

Posted by: Bernard Yomtov on December 22, 2003 07:49 PM

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NRO writes "means the economy is doing great...people no longer feel the need to shop... low class"
Quite right. And for confirmation lets check out the auto sales of, say, Lexus and Mercedes vs those for humble Fords and Chevys.
'The economy' is doing great for Dick Grasso's successor too. Just a tad better than, say some of those IT workers who saw there jobs migrate to India.
Pretty hard to quibble with those that are a little concerned about the Wall Mart numbers.

Posted by: calmo on December 22, 2003 07:51 PM

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I don't think this is a bad thing. People aren't buying crap. It's going to be a great Christmas!

Posted by: pills on December 22, 2003 08:31 PM

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Bernard Yomtov writes:
>
> But Wal-Mart has stores that have been open less than a
> year also, so the actual increase in Wal-Mart's sales is
> greater than this figure. I don't think it's reasonable to
> assume that the new stores' sales are just taken away
> from existing non-Wal-Mart stores, so the new stores
> too represent an increase in total retail sales.

That doesn't necessarily follow. The introduction of a Wal-Mart tends to do two things. One thing it does is cannibalize the sales of competitors directly (and also of other Wal-Marts, as it turns out). But another thing it does is put big-time pressure on prices. I believe I have seen a figure quoted in the grocery category is that prices drop 15% when Wal-Mart comes to town. I'm skeptical the drop is that high, but I know there is one. But once you are a year past the opening, most of that transient stuff has already happened, so it should be a less complicated measure.

Another point that is worth noting is that Wal-Mart opens locations in a non-random order: they open first in the locations where they expect to see the best results, which are inevitably where they either enjoy a huge price advantage or where they expect the market to grow (or both). Since Wal-Mart has grown so fast, most of its stores are now in locations that they chose in the past decade or so, which should be places that are growing in population by at least 1% per year. Inflation has been subdued recently, but is running close to 2% now I believe. So a year-over-year change of 3% in same-store sales is...really unimpressive. I'm hoping that some of this is due to the continued flight to the web for holiday shopping, but that's hardly a sure thing.

Posted by: Jonathan King on December 22, 2003 09:24 PM

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I don't understand why relatively low holiday shopping is a surprise if unemployment happens to be a problem at this time.

It could also be that the American "consumer society" is becoming saner, no?

I mean I recall reading in a book on entrepreneurship in 1970s that a man working out of his kitchen published an ad in newspaper offering three goose feathers in an envelop by mail for three dollars and he was happily overwhelmed by demand.

Maybe Americans are now on a trend towards no longer having time or money for non-sense?

Posted by: Bulent Sayin on December 22, 2003 11:44 PM

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CNN/Money is reporting that the increase in personal spending was less than expected. Commerce Dept. says spending rose by 0.1% in Oct. and 0.4% in Nov.

Posted by: Harold McClure on December 23, 2003 06:45 AM

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Jonathan,

There certainly is some cannibalization, but I find it hard to believe that this accounts for all or most of the sales at a new store.

You point out that Wal-Mart is likely to open stores in growing areas. Doesn't this suggest that the sales in these stores represent actual growth, and not cannibalization?

Lacking data, it's impossible for us to say what the mixture of effects is. I was just trying to make the point that the particular figure cited by the FT, Wal-Mart same-store sales growth, has a downward bias when used as an indicator of overall retail sales growth.

Posted by: Bernard Yomtov on December 23, 2003 06:58 AM

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Bernard:

Let me take a crack at this. The reason why same-store sales are a better indicator than total store sales is that they compare apples to apples.

You want data that tracks trends in the retail industry. Chain stores are wonderful for this, since chains are fairly stable, each franchise sells a comparable line or merchandise, and chains like to collect and collate data from their far-flung stores. (None of this is true of mom-and-pops.)

But if a chain is growing (or shrinking) then the real trend is being masked by the growth in franchises. If J-Mart reports 7 percent growth in overall sales, but added 50 stores to its previous 1000, what can you say about the trends in retail? Not much--you have to make all sorts of assumptions and inferences about the nature of the new stores, whether they are selling below the trend or above it, and on and on. But if same-store sales at J-Mart are growing at 1.5 percent, that becomes a more meaningful number, since there are far fewer assumptions.

For a chain like Wal-Mart, new-store sales are even more problematic for understanding broader economic trends, since it is widely believed (and probably true) that new Wal-Marts tend to soak up sales that previously went to smaller chains and mom-and-pops. For every million dollars that goes into the new Wal-Mart on the edge of Dogville, there's a multi-hundred-thousand dollar decline in the sales at pre-existing Dogville businesses.

Hope this clears up your confusion.

Posted by: jlw on December 23, 2003 07:27 AM

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Bernard:

Let me take a crack at this. The reason why same-store sales are a better indicator than total store sales is that they compare apples to apples.

You want data that tracks trends in the retail industry. Chain stores are wonderful for this, since chains are fairly stable, each franchise sells a comparable line or merchandise, and chains like to collect and collate data from their far-flung stores. (None of this is true of mom-and-pops.)

But if a chain is growing (or shrinking) then the real trend is being masked by the growth in franchises. If J-Mart reports 7 percent growth in overall sales, but added 50 stores to its previous 1000, what can you say about the trends in retail? Not much--you have to make all sorts of assumptions and inferences about the nature of the new stores, whether they are selling below the trend or above it, and on and on. But if same-store sales at J-Mart are growing at 1.5 percent, that becomes a more meaningful number, since there are far fewer assumptions.

For a chain like Wal-Mart, new-store sales are even more problematic for understanding broader economic trends, since it is widely believed (and probably true) that new Wal-Marts tend to soak up sales that previously went to smaller chains and mom-and-pops. For every million dollars that goes into the new Wal-Mart on the edge of Dogville, there's a multi-hundred-thousand dollar decline in the sales at pre-existing Dogville businesses.

Hope this clears up your confusion.

Posted by: jlw on December 23, 2003 07:32 AM

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Bernard:

Let me take a crack at this. The reason why same-store sales are a better indicator than total store sales is that they compare apples to apples.

You want data that tracks trends in the retail industry. Chain stores are wonderful for this, since chains are fairly stable, each franchise sells a comparable line or merchandise, and chains like to collect and collate data from their far-flung stores. (None of this is true of mom-and-pops.)

But if a chain is growing (or shrinking) then the real trend is being masked by the growth in franchises. If J-Mart reports 7 percent growth in overall sales, but added 50 stores to its previous 1000, what can you say about the trends in retail? Not much--you have to make all sorts of assumptions and inferences about the nature of the new stores, whether they are selling below the trend or above it, and on and on. But if same-store sales at J-Mart are growing at 1.5 percent, that becomes a more meaningful number, since there are far fewer assumptions.

For a chain like Wal-Mart, new-store sales are even more problematic for understanding broader economic trends, since it is widely believed (and probably true) that new Wal-Marts tend to soak up sales that previously went to smaller chains and mom-and-pops. For every million dollars that goes into the new Wal-Mart on the edge of Dogville, there's a multi-hundred-thousand dollar decline in the sales at pre-existing Dogville businesses.

Hope this clears up your confusion.

Posted by: jlw on December 23, 2003 07:37 AM

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Professional investor here.

Same-store sales at locations open a year or more is a much better indicator than total sales for a company such as Wal-mart that's still opening stores . . . . . . . if you just look at total sales, then the faster a company opens new locations, the faster total sales will grow as a percentage. So the total sales statistic tells you more about how fast the retailer is opening new stores than it does about how strong the retailer's business is.

That said, I think that Wal-mart is close to running out of sales momentum, which may be part of the below-expectation same store comp sales result. First, Wal-mart started off as a regional chain and then grew rapidly but intelligently by expanding geographically across the U.S. But Wal-mart is national now, so there are no benefits of expansion into untapped areas of the United States.

Second, Wal-mart's entry into the low-margin not very attractive grocery business is a sign to me that they're stretching to grow the business. The entry into groceries makes sense, but it's not nearly as attractive a business as the general/discount merchandise business - not an arguable point, because Wal-mart is smart and they went into general/discount merchandise long before going into groceries. They had to push into groceries to keep their business growth from stalling out as they saturated their presence in the general merchandise business.

Last, comp stores sales in stores open for twelve months is itself a misleading statistic BECAUSE Wal-mart stores do not fully mature until they've been open for 18-36 months. Some of Wal-mart's strong comp stores sales over the past decade or two has been driven by the fully-maturing of their quite young store base. But now the proportion of fully-mature stores in the Wal-mart system is pretty large as a percentage of total, so the benefits of growth from seasoning of the store base are greatly diminished.

There may also be a little "trading-up" by consumers this Christmas - Wal-mart does sell discount merchandise and reportedly did benefit from consumers "trading-down" during the recession. I'm less sure of this effect than the first three points above - but if Wal-mart did benefit from trading down in the recession, it is logical that they would lose out somewhat from trading up as the economy and consumer sentiment recover.

Posted by: Anarchus on December 23, 2003 07:39 AM

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jlw and Anarchus,

Thank you for your comments, but I am not at all confused.

My first comment explicitly stated Anarchus' point - that same store sales are what is useful for a evaluating a company.

My second comment, in response to Jonathan King, explicitly recognized that the total growth of Wal-Mart's sales inevitably includes some cannibalization of its own and other stores' sales. Hence, as I fully recognize, to take their total sales growth as an indicator of economy-wide growth would be inaccurate; the estimate would be biased high.

Similarly, because not all the new-store sales are cannibalized, taking same-store sales as our indicator is also inaccurate, because this number is biased low. That was my point.

If there were 100 stores in town last year, and there are 110 this year, the growth in sales of the 100 old stores would be less, probably, than the town's total sales growth. The sales of the ten new stores come partly from the old ones, and partly represent new activity. This is true of the country as well.

The FT article implied that retail sales were going to be below expectations, and used Wal-Mart's same-store growth as evidence. I just wanted to suggest that this evidence has a pessimistic bias.

Posted by: Bernard Yomtov on December 23, 2003 09:24 AM

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Just to clear up some confusion on the thread, the first post was almost certainly satire. The e-mail address is a dead giveaway that this is someone channeling Mickey Kaus.

My prediction, based on nothing more than personal observation and gut instinct: this Christmas will show the strongest sales growth since 1999, with most of the gain being in online sales. Wal-Mart data will be revised upward. Sales will be good at most income levels. Personal debt levels will reach new heights.

Posted by: Charles on December 23, 2003 09:51 AM

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In the just released personal income data the
real PCE data shows that the OCT & NOV average
is above the third quarter average at a 2% (AR).

Based on this data it looks like fourth quarter real PCE growth will be on the order of 2.5% to 3%. If Dec real growth is 0.1%, the third Q to fourth Q growth rate for real PCE will be about 2.5%.If the DEC increase is 0.4%, the Q/ Q growth rate will be 2.9%.

The last sentence in the original report does not make sense. But the FT source is OK, but I do not recognize the original source: Home US.

Posted by: spencer on December 23, 2003 10:35 AM

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Spencer, "FT Home US" means the part of FT that has its home in the USA. Or else they don't know to write...

DSW

Posted by: Antoni Jaume on December 23, 2003 04:14 PM

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let me preface this buy saying that economics is not my thing...

with that said, how can any analysis of Wal-mart's sales be done without an accompanying analysis of Target. Frankly, I think that if Wal-mart sales are low for the holidays, it might be because traditional Wal-mart shoppers are going to Target because it is seen as slightly higher class and people deserve to be slightly higher class for the holidays. Totally a matter of perception, but personally, I'd never get Christmas gifts at Walmart even if I shopped there regularly (unless they had special Black Friday deals on certain key items), but I'd go to Target because it is marketed like a legitimate department store for middle class people in addition to providing Walmart-esque discounts. I'm just saying that Walmart is not a good stand alone indicator without Target, Kmart, Kohls etc.

Posted by: lauren sturm on December 23, 2003 09:26 PM

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