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Grim News from Walmart and Target

Federal Reserve chief Ben Bernanke can explain all he wants about how the recent spike in food and gas prices is only transitory, but for moderate and lower income families, transitory doesn't help much when you've got to pay those higher prices today. And the news from Walmart and Target, two of the best real-world barometers of how those consumers are coping, suggests that transitory or not, the economic recovery faces a severe headwind if food and gas prices don't settle down soon.

Over the past two days, both Walmart and Target reported disappointing first-quarter earnings. The mega retailers pretty much had the same explanation: rising gas and food prices squeezed out other purchases by their moderate-budget clientele. "We're simply not converting enough of our grocery customers to shop apparel," explained William S. Simon, president of Walmart's U.S. division in a conference call with investors.

Walmart and Target also are hurting from less foot traffic in their stores, as the high price of gas has reduced how often shoppers swing by the stores. The less you're in the store, the less opportunity for you to spend, especially on indulgences and sales items strategically placed to catch your eye. In fact, a Gallup poll out this week reports that nearly one-third of Americans say they are driving less and hanging out at home more due to the spike in gas prices. Moreover, 12 percent of Americans say they are spending less on groceries and other expenses because of the rising cost of gas.

A Tale of Two Consumers
While disappointing sales at Walmart and Target signal trouble for lower and moderate income shoppers, higher-income consumers have, not surprisingly, been able to better absorb the higher cost of gas and food. At the same time Walmart and Target issued their desultory first-quarter results, Whole Foods (a.k.a. Whole Pay Check) reported its strongest quarterly financial results in five years, Saks surprised on the upside with same-store sales open at least one year growing 10.2 percent in the first quarter, and Nordstrom clocked in with a very strong earnings report last week. Even the more upscale Sam's Club division of Walmart had a relatively good quarter, with same store sales rising 4.2 percent, blowing past the firm's forecast of a 3 percent rise. The higher-end consumer is clearly feeling more confident, but without the lower end feeling the same, it's hard to envision the economic recovery picking up much speed.

Relief on the Way?
The economic tea leaves suggest that perhaps the first quarter may have been the worst of it for Target, Walmart, and their millions of gas-pinched customers. Some economists believe consumer inflation has reached its peak. Indeed, since the end of March, oil prices have fallen 10 percent, and the forecast is that gas prices could fall by as much as 50 cents from their recent $4 a gallon high by the start of summer. If that 12.5 percent reduction materializes, it would obviously leave more money for other spending, and could be enough good news to get folks to the stores more often.

Grocery shopping will remain a bit of a challenge, as the forecast for food price inflation was tweaked a bit higher last month. But there are in fact many foods that have been relatively immune from inflation (think chicken and eggs over beef and pork), so savvy shoppers can indeed stretch their paychecks with some strategizing.

Yet while gas prices may ease a bit, and food inflation hasn't been as dramatic as the nightmare at the gas pump, shoppers could soon be in for a different round of price hikes. In reporting its first quarter results, Target said while it had increased some prices this spring by single digits, it expected to impose double-digit price increases this fall on a wider array of its apparel and home merchandise. Consider yourself forewarned.

Photo courtesy Flickr user hoesly
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