Last week, Walmart (WMT) disappointed investors by telling them probably the best news of the quarter: Americans are saving their money instead of spending at Walmart. Don’t get me wrong, I wasn’t the happiest investor on earth when WMT published a declining profit (-7%) and missed analysts’ estimates for sales. The list of excuses offered various explanations; currency headwinds (which seemed to be the buzzword for this quarter across all companies), rising wage costs (another problem facing other big firms with low income employees) and… the fact that US consumers are not buying more stuff. The consequence for WMT was immediate; the stock lost roughly 4% within hours.
Buyers Don’t Buy…
I know, we all want to see the US consumers buying more. After all; 71% of the US GDP is fueled by them. At the beginning of the year, many specialists expected an important growth of consumer spending since gasoline prices dropped opening the door for more discretionary spending. While I’m not a specialist, I agreed with this theory as history has proven each time the price of oil drops, the GDP increases. The correlation is obviously not perfect, but we can see a general trend that whenever Americans have more money in their pocket due to a drop in the price of any goods, they usually buy more of something else.
So far, the story seems different in 2015. Is it the post traumatic effect of the most recent crisis in 2008 when Americans had to tighten their belt and start saving money and pay off their debts? I’d like to believe so. If this is the case; it could be the best news of the year!
Problems for Walmart, Good News for Investors
CEO Doug McMillon mentioned, “many of our U.S. customers are using their tax refunds and the extra money from lower gas prices to pay down debt or put it into savings.” This is obviously a short term problem for Walmart and other companies in the consumer sector. When the half of your business that comes from outside the country is hit by currency headwinds; you hope that your “home base” will compensate and save the numbers. Everything was in place to benefit from a small economic boom in the US but Americans have decided otherwise so far; they paid down their debts and continued saving their money.
Why this is good news?
This is definitely not good news if you are staring at your computer all day looking at your portfolio. The Street wants to see sales and profits climbing, all the time. But this is not a logical and possible solution. Consider the economic cycle like a marathon; you can’t run full speed the whole time. Sometimes, you have to slow down a bit and catch your breath. I would rather see consumers paying down their debts and saving money for darker times than spending their whole paycheck down to the last penny. Sure, that would boost sales of many companies in a heartbeat and shares would rise. But if this situation is not sustainable, we should rather take a break every now and again and continue once we have more money saved on the side.
Consider the economic cycle like a marathon; you can’t run full speed the whole time. Sometimes, you have to slow down a bit and catch your breath.
I’m an American Consumer
Over the past three years, I’ve been doing exactly what my southern neighbors did; save money and pay off my debts. Three years ago, I had about 30K in consumer debt (excluding my car loan). Since January 2015, that 30K in debt is completely gone. Over about 30 months, I’ve paid off my debts systematically and stopped several unhealthy spending habits. I now have a monthly budget for wine and restaurants and I’ve cut down my car expenses by selling my second vehicle.
I’m well aware I didn’t contribute to the economy during that period as the bulk of my income was used to pay off debts instead of buying more goods supporting my local economy. However, while I slowed down my expenses for a few years, I’m now in a much better financial shape to continue my marathon. I paid my dues and nobody lost money during the process. I’m now able to use my free cash flow generated from my debts paid to spend it elsewhere.
Over the past three months, we have spent lots of money toward our RV project. I can now use my own money to fund this project instead of borrowing it. The big difference is that I can contribute to the economy in a healthy way now.
Slowing Down Now to Pursue Current Bull Market
This is why I think it’s good news that consumers are saving their money. The gasoline price situation is not eternal and I would rather see the population saving this money then generating more loans with new monthly payments. At one point, the gasoline prices will rise and those who have new financial obligations will have a hard time with their budget.
If the consumption rate is slower than expected but sustainable, this should be a factor helping the current bull market. Therefore, all you need to do now is to benefit from the recent drop of some companies to buy more of them! I’ve made a quick list of interesting stocks here for those who are looking for a starting point.
Disclaimer: I own WMT shares.