NEW YORK – As Americans' financial fortunes go, so goes Wal-Mart.
The world's largest retailer on Thursday reported that a lower tax rate boosted net income by 8.6 percent during the fourth quarter, but the company offered a tempered forecast as its lower-income shoppers struggle with rising gas prices, delayed income tax refunds and higher payroll taxes.
Since Wal-Mart accounts for nearly 10 percent of nonautomotive retail spending in the U.S., its results and outlook offer a glimpse into how Americans are being affected by economic challenges. Low- and lower-middle-income Americans continue to struggle even as the housing and stock markets have improved. And while Wal-Mart's results for the fourth quarter were promising, the retailer's forecast for the current quarter shows that consumers still are being pinched.
"We know there are challenges ahead," said Charles Holley, Wal-Mart's chief financial officer, said in statement.
Wal-Mart, based in Bentonville, Ark., said that it had a strong start to the winter holiday shopping season, which typically runs from November through December, but the first three weeks of December were weak and business has been volatile ever since.
Wal-Mart said in Thursday's report that February started "slower than planned" but noted that it was largely due to the Internal Revenue Service's decision to delay accepting tax returns by eight days until Jan. 30 because of late Congressional action to tackle the budget crisis last year.
That resulted in Wal-Mart customers cashing about $1.7 billion in income tax refunds year to date, compared with $4 billion for the same time period a year ago, Bill Simon, president of the company's U.S. namesake division, said. Shoppers last year had used refund money to buy TVs ahead of the Super Bowl, Simons said. But this year, the retailer isn't sure how customers will use the refunds.
Going forward, the retailer said it's unclear how the payroll tax, implemented last month when the U.S. government allowed a temporary 2 percentage point cut in Social Security taxes to expire last month, will affect spending. Indeed, nearly all working Americans are taking home less pay and JP Morgan estimates that payroll tax increase will equate to $70 per month less in take home pay for Wal-Mart shoppers, assuming an average annual income of $42,500.
Simons said that shoppers are "talking about" the payroll tax, so the company is doing things like offering smaller packaging and less expensive products.
In addition to its customers' economic concerns, Wal-Mart said it still is grappling with allegations that surfaced last April that it failed to notify law enforcement that company officials authorized millions of dollars in bribes in Mexico to speed up getting building permits and gain other favors. The Foreign Corrupt Practices Act forbids American companies from bribing foreign officials.
The company has launched its own investigation and is working with government officials in the U.S. and Mexico. In November, the retailers said in a filing with the Securities and Exchange Commission that it was looking into potential U.S. bribery law violations in Brazil, China and India.
During a pre-recorded call to investors Thursday, CEO Mike Duke said that the company has "made significant improvement to our compliance programs around the world in 2013 and took a number of specific actions with respect to the processes, procedures and people."
In the fourth quarter, Wal-Mart said it earned $5.6 billion, or $1.67 per share, up from $5.16 billion, or $1.50 per share, a year earlier. Results were helped by a lower tax rate, which was 27.7 percent, compared with the rate of 30.9 percent a year ago. Net sales rose 3.9 percent to $127.1 billion. Earnings topped Wall Street estimates of $1.57 per share, but sales fell short of the $127.8 billion analysts were expecting.
During the current quarter, Wal-Mart says it expects earnings per share to range from $1.11 to $1.16 per share, below the $1.18 per share analysts polled by research firm FactSet are expecting. Wal-Mart says its guidance includes about $40 million to $45 million in first-quarter costs related to matters related to the Foreign Corrupt Practices Act and compliance issues. For the year, Wal-Mart expects earnings per share of between $5.20 and $5.40 per share, while analysts expect $5.38 per share.
Despite the subdued forecast, investors were bracing for a weaker report after Bloomberg published a story Friday that leaked an email from a top executive characterizing the first two weeks of February as "a total disaster." Shares fell that day, but investors appeared to be relieved that Wal-Mart's outlook wasn't worse. Shares rose more than 2 percent, or $1.49 per share, on Thursday to $70.70 in trading.