What Wal-Mart's Dismal Sales Mean for These Retail Stocks

While we showed you last week how high-end retail stocks were soaring right now, on the flipside of things is Wal-Mart Stores Inc. (NYSE: WMT).

A Wal-Mart executive offered a candid view of just how bad sales have been of late in an e-mail to other company execs obtained by Bloomberg News.

"In case you haven't seen a sales report these days, February [month-to-date] sales are a total disaster," Jerry Murray, VP of finance and logistics, said in the Feb. 12 e-mail. "[It's] the worst start to a month I have seen in my seven years with the company."

The retail giant's woes stem from a confluence of factors hurting sales: the 2% increase in the payroll tax, the recent surge in gas and food prices and consumer confidence levels sinking to their lowest since 2011.

How Bad Are Wal-Mart's Numbers?

Wal-Mart actually beat earnings estimates when it announced its fiscal fourth-quarter results on Feb. 21. But the earnings beat was mostly due to Wal-Mart paying a tax rate of 27.7% in the fourth quarter, compared with 30.9% a year ago, because of additional tax credits.

The company missed on revenue estimates, and the all-important figure for retailers, same-store sales, grew only 1% in the U.S.

Wal-Mart issued a gloomy outlook for the remainder of the year.

It now expects to earn $1.11 to $1.16 per share in the current quarter, below analysts' average estimate of $1.18. For its fiscal 2013, Wal-Mart now expects earnings of $5.20 to $5.40 per share. Analysts expect earnings at the high end of that range, with an average $5.38 per share estimate.

And that doesn't bode well for other discount retailers.

"Wal-Mart moms are the barometer of the U.S. household," Brian Sozzi, chief equities analyst at NBG Productions, told the Associated Press. "Right now, they're afraid of higher taxes and inflation."

Besides higher taxes and rising gas and food prices, delayed tax returns because of the last-minute fiscal cliff deal are also hurting consumer spending levels. Wal-Mart said its customers have cashed about $1.7 billion in income tax refunds so far this year, much lower than the $3 billion in the same period a year ago.

While investors should be cautious about discount retailers as a whole right now, one sector stands out as particularly vulnerable: dollar stores.

Is This the End of the Dollar Stores' Run?

Dollar-store stocks have been darlings of Wall Street for a few years now, but that appears to be changing.

On Jan. 3, Family Dollar Stores Inc. (NYSE: FDO) reported lower-than-expected earnings for its fiscal first quarter and lowered guidance for the year. Its stock has slipped more than 20% in the past three months.

Dollar Tree Inc. (Nasdaq: DLTR) has slipped 2.9% over the past three months and Dollar General Corp. (NYSE: DG) is down 8%, even as the S&P has gained 8.7%

And the trouble could be just starting for these discounters. They're in the midst of expansion plans even though their earnings have fallen. 

That means the dollar stores now face stiff completion among themselves for a consumer base that is tightening up spending.

Dollar General will open 635 stores in 2013, including its 11,000th store; Family Dollar has over 7,000 locations and will add 500 more this year; and Dollar Tree, the only store that actually sells everything for $1 or less, expects to add 200 more stores to bring its total to just under 5,000.

"There was enough business for two chains to grow strongly with rising margins, but since Family Dollar started pushing hard, it may be harder to do," Aram Rubinson, a retail analyst at Nomura Securities, told The Wall Street Journal.

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