Fuel Prices Put Dent in Wal-Mart's Outlook

By Leslie Earnest and Claire Hoffman

Aug. 17, 2005 12 AM PT

Times Staff Writers

The yearlong run-up in gasoline prices has caught up with the world’s biggest company.

Wal-Mart Stores Inc. on Tuesday reported its smallest quarterly profit increase in four years and lowered its projections for the remainder of the year, blaming the downturn on record oil prices. It was strong evidence that high energy costs are cutting into consumer spending. The report also unnerved investors, who sent the Dow Jones industrials lower by 120 points.

Alicia Ramirez, a fourth-grade teacher from La Puente, said she was among the many feeling the pinch.

“I’m not here as often as I used to be,” said Ramirez, who was buying school supplies at Wal-Mart in the City of Industry on Tuesday afternoon. “Right now gas is horrible. My budget has gone down, and everything is going up and we aren’t getting the raises we need.”

High gas prices have “become very top of mind with many consumers,” said Marshal Cohen, chief analyst of NPD Group, which tracks consumers’ buying habits. When 62,000 people were queried in October and asked whether higher gas prices would crimp their spending, 42% said yes. Last week, 61% said it would cause them to skimp on purchases.

Most of the respondents who weren’t yet worried said they would be if gasoline prices rose past $3.

“And guess where we’re hovering?” Cohen asked.

The average cost for self-serve regular gasoline hit $2.524 a gallon in the U.S. on Tuesday, another high, according to a daily survey by AAA. The most-expensive gasoline was in California, where prices increased to $2.765 a gallon Tuesday, eclipsing prices in Hawaii.

The price of diesel, which powers the trucks of Wal-Mart and others moving consumer goods around the country, has soared more than gasoline. Nationwide, a gallon of diesel fuel averaged a record $2.59; in California, it averaged $3.129.

The cost to move freight from Wal-Mart’s distribution centers to its stores dinged operating profit by at least $30 million, the company’s Chief Financial Officer Thomas M. Schoewe said.

Wal-Mart executives said that while second-quarter profit rose 5.8% from a year earlier, the company would not meet expectations for the current quarter. That news knocked 3% off the retailer’s share price. Other retailers’ stock prices also lost ground.

Although government reports show no evidence that consumers are trimming their spending, economist Richard Yamarone thinks “the story is going to be very different from here out.”

In “channel checks” with retail executives and store managers across the country, his firm has gathered evidence that the pace of spending has slackened and that more people are car-pooling or taking public transportation to work, said the director of economic research for Argus Research, an independent equity research firm in New York.

“We’re just hearing now that consumers are indeed starting to react,” Yamarone said. “I think we’re really starting to see people acting with their feet -- maybe walking out of the store instead of buying something, or postponing a purchase, unless it’s absolutely necessary.”

Some analysts warned that the higher gas prices and lower consumer spending could ricochet through the economy. A report released by Merrill Lynch last month declared that every penny increase at the gas pump drains as much as $1.5 billion from household cash flow.

Consumers nationwide have been facing record-setting prices for gasoline for much of the year, reflecting the soaring cost of crude oil. Industry experts have warned consumers to expect fuel prices to jump higher. Last week, the Energy Information Administration predicted that gasoline prices would remain above $2 a gallon for the next year.

To be sure, consumers have not been holding back. U.S. retail sales jumped 1.8% last month as buyer incentives led to the biggest gain in auto sales since the terrorist attacks in 2001.

Rising gas prices also added to the overall sales gain, which economists said underscored the economy’s vigor even though it fell short of Wall Street forecasts.

After two months of strong auto sales, “that component [of spending] is virtually certain to fall,” said Dean Baker, a co-director of the Center for Economic and Policy Research in Washington. “My guess is we will see a drag on spending in general because people bought all these new cars, and in many cases, committed themselves to substantial monthly payments.”

Baker said consumer spending has held up partly because people have been using their homes to secure cash, pulling money from equity lines and refinancings.

“Clearly that’s making up for the hit people are taking for higher gas prices,” Baker said. “How long it can keep going on is hard to say.”

The higher oil prices have been roiling the stock market lately, as investors look for hints that consumers are about to snap shut their wallets.

But not everybody thinks gasoline prices are to blame for retailers’ woes.

“I think higher gas prices becomes an easy excuse,” said Britt Beemer, chairman of America’s Research Group in Charleston, S.C. “If you can’t get your numbers, it has to be something else.”

At Bentonville, Ark.-based Wal-Mart, profit in the second quarter ended July 31 rose to $2.81 billion, or 67 cents a share, up 5.8% from $2.65 billion, or 62 cents, a year earlier. Earnings edged past analysts’ expectations.

Sales rose 10.2% to $76.8 billion. U.S. same-store sales, or sales at stores open at least a year, rose 3.5%.

Wal-Mart warned that profit would be lower than expected in the third quarter, at 55 cents to 59 cents a share.

For the year, the company said it expected per-share profit of $2.63 to $2.70. At the start of 2005, Wal-Mart said earnings probably would be $2.70 to $2.74 a share, but it had hinted earlier that it would be hard to meet those numbers.

Wal-Mart shares dropped $1.53 to $47.57.

(BEGIN TEXT OF INFOBOX)

Fueling less spending

In an annual survey of U.S. consumers in May, about two-thirds of the respondents said gasoline prices had affected their other spending

How have fluctuating gas prices impacted your spending? (Respondents could select more than one answer.)

Decreased vacation/travel: 31.2%

Reduced dining out: 25.2%

Spending less on clothing: 23.7%

Spending less on groceries: 17.3%

Delayed major purchase (car, TV, furniture): 16.4%

Increased carpooling: 5.7%

No major impact: 33.8%