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Wal-Mart’s Guidance Increase: Get Used To It

If people are shopping at Wal-Mart (WMT) because of their “wealth evaporation” then it will be years before the trend reverses..

Wal-Mart said first-quarter earnings would come in higher than the company previously expected. They now see its first-quarter earnings between 74 cents and 76 cents per share, compared to its previous estimate 70 cents to 74 cents per share.

Now a common refrain out there is that people are trading down to Wal-Mart from Target (TGT). I happen to disagree. While I think some people are indeed trading down, the changes the company has made to scores of locations, it online dominance and its new “Save More, Live Better” ad campaign have more to do with it. But, for arguments sake, lets go with “trading down”.

The wealth loss in the US is due to one thing, housing. People still have jobs as the unemployment rate is low and wages are actually rising. It is the value of their homes, their largest expense, and the fear that illicits are creating the current environment.

Now, since housing prices have fallen at the fastest rate in almost 100 years, this wealth deficit has been dramatic. It also means that a recovery to pre-bubble levels will take years, maybe decades. People who bought homes in the last 3 years have a negative equity or, now not enough to tap for loans. Sensing this, they will spend accordingly.

If this is the reason people are running to Wal-Mart rather than the other retailers, one can only assume this trend will be in effect for the foreseeable future.

For shareholders of Wal-Mart, that is indeed good news. For holders of Target (TGT), JC Penny (JCP) and others, it means rapidly shrinking margins and the necessity to redefine themselves.

Disclosure (“none” means no position):Long WMT

Todd Sullivan's- ValuePlays

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