Tuesday, August 16, 2005

Wal-Mart: Gorilla in the Gold Mine

Forget canaries in the coal mine, in the retail industry, watch Wal-Mart. This may be counter-intuitive since Wal-Mart is the biggest and beefiest, but it's true.

Wal-Mart's earnings almost always directly track with oil prices. Why? Because their costs are so low that the transportation costs--the cost of getting their merchandise from there to your local store here--eat into the tiny profit margin. Note I say margin, not profit, because Wal-Mart's profits are up, 5.8% this quarter, but that is lower than expected and lower than the last four years.

Some say that Wal-Mart's merchandise suffers when compared to Target, J.C. Penney et al. While it's true that Target possesses more panache and J.C. Penney (why do people shop there again?) has some interesting stuff, it is the consumer NOT the merchandise that is suffering at Wal-Mart.

Wal-Mart's prices can't be beat. They make their money on volume. All people shop at Wal-Mart. Target skews to the trendy, hip and more well-heeled. But not much more.

If oil prices continue their upward spiral, all retailers better watch out. Winter is coming, winter is coming! People are not insulated enough, even rich people, to spend $80 bucks to fill up their Suburban and $700 to heat their homes and then go spend, spend, spend--at Wal-Mart or Target.

The only retailer catering to wealthy enough people is Neimans. And the only time they suffer is when oil goes bust. Link
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