Wal-Mart stock got hammered today after the retailing giant cut its profit outlook for the rest of year, saying its customers were under "economic pressure." Now I can almost guarantee you that some congressman or think-tank economist somewhere is going to point to Wal-Mart's troubles (which many elites will delight in) as a worrisome symbol of growing income inequality, a sign that the company's supposedly lower middle-class customer base is getting left behind by the current economic expansion. A few thoughts on that:
1) Wal-Mart CEO Lee Scott made a point of saying customers globally, not just in America, were under financial pressure. Indeed, one of Wal-Mart's biggest trouble spots was in Japan, where its retail unit, Seiyu Ltd., said it now expects to post its sixth straight annual loss on weak sales. Yet Japan is noted for its income equality, ranking second—behind only Denmark—among all nations, according to the United Nations.
2) Income-inequality worriers argue that it's basically only earners at the very tippy-top of the income ladder making any dough, with the rest of us just breaking even. If so, I would expect all manner of big-box retailers to be suffering. But that is certainly not the case. In its most recent earnings report, Target reported net earnings of $651 million, up 20 percent from a year earlier. At Costco, profits were up 14 percent in its most recent quarterly report. But Wal-Mart has them all beat. Its earnings rose 49 percent in the second quarter, but the weaker outlook—along with the sliding stock market—had Wall Street selling.
3) Wal-Mart is a behemoth with its best days of growth most likely behind it, no matter what financial state consumers are in. To compare its performance today with what it did in the 1990s or 1980s is ridiculous. Last year, Wal-Mart had profits of $11.2 billion on sales of $345 billion. Here is Citigroup's big-picture take on Wal-Mart:
We rate WMT low risk based on stock liquidity, earnings stability, price volatility, and financial strength.... Risks...include: 1) Wal-Mart's size may hinder both sales and earnings growth in the future; 2) Wal-Mart is a high-profile target for lawsuits and, at any given time, it is subject to class-action and other lawsuits that could carry considerable costs and impact to earnings; and 3) continued negative coverage by the media is creating "headline risk" that could damage the company's brand image, affecting its ability to expand into new areas, retain high-quality employees, and to attract new customers.
4) Again, to the extent that income inequality is increasing, it's due to higher financial rewards for higher education, globalization providing wider markets for some occupations, and, finally, financial income outstripping labor income—a good reason to enlarge America's investor class as much as possible.