Gasoline Prices Threatening Retail Sales
By Emily Kaiser
CHICAGO (Reuters) - Record U.S. gasoline prices threaten to stall a retail sales rally this summer once consumers spend hefty income tax refunds, analysts said on Thursday.
Discounters such as Wal-Mart Stores Inc. (NYSE:WMT - news) are likely to suffer most because many of their customers live paycheck to paycheck, so extra money spent on gas means that much less going into stores.
A handful of chains that sell gasoline, including BJ's Wholesale Club. Inc. (NYSE:BJ - news), stand to benefit as customers look for lower pump prices, but the challenge will be maintaining profits in the face of rising gas prices, analysts said.
Wal-Mart, the world's biggest retailer, calls high fuel prices an "effective tax on our customers," and has singled out record gasoline costs as one of the biggest obstacles to its sales growth.
So far this year, tax rebate checks that were fattened by last year's tax cuts are propping up sales at stores open at least a year -- also known as same-store sales. Retailers have recorded strong year-over-year sales growth, and analysts widely expect that to continue through the spring.
Sales strength should also translate into big profits. Analysts are looking for 14.5 percent year-over-year earnings growth in the first quarter, which ends in April for most U.S. retailers, and 16.9 percent earnings growth for the second quarter, according to Reuters Research analysis of more than 140 U.S. retailers.
But pump prices, which hit a record-high average price of $1.742 per gallon on Thursday, are cutting into the tax refunds. Gas prices usually peak in the summer driving season, which begins with Memorial Day weekend in late May.
"It's never a good thing for consumers," said Scott Krugman, spokesman for the National Retail Federation trade group. "Eventually it's going to have to affect consumer spending."
SECOND-HALF SLUMP?
For now, "the net effect is still that the tax rebate checks carry the day and allow retailers' (sales growth) to remain strong," said Bill Dreher, analyst with Deutsche Bank.
Dreher estimated that record gasoline prices gobbled up about 25 to 30 percent of the money consumers received in bigger tax rebate checks. That still leaves a considerable amount for them to spend in stores, he said, which should help retailers deliver strong first-quarter results.
But once the tax returns have been spent or put into savings, retailers could have a tough time maintaining the robust sales performance.
Indeed, Wal-Mart itself has told analysts to expect stronger first-half sales for the retail sector as a whole, with demand dropping off later in the year.
"In the back half of the year, we have this negative confluence of events," said Martin Bukoll, retail analyst with Northern Trust. "Unless jobs are created and unless oil prices go down, you'll have an impact on real disposable income."
For retailers that sell gasoline, the steep prices are a mixed blessing. Warehouse clubs like BJ's and Costco Wholesale Corp. (NasdaqNM:COST - news) tend to draw more customers when prices rise because they charge less than traditional gasoline stations, but it also becomes tougher to turn a profit.
"BJ's does a very good job of maintaining the profitability of gasoline sales," Deutsche Bank's Dreher said. "Costco ... has commented in the past that during rapid inflation they will at times lose money on gasoline sales."
Costco and BJ's did not immediately return calls seeking comment.
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