Reuters logo
3 years ago
Lower US gas price could pump up Wal-Mart, other discount chains
October 10, 2014 / 10:06 PM / 3 years ago

Lower US gas price could pump up Wal-Mart, other discount chains

3 Min Read

Oct 10 (Reuters) - Lower gasoline prices are expected to fuel higher retail sales this winter, especially at Wal-Mart Stores and other chains that cater to low- to middle-income shoppers, analysts said.

The average price at the pump dropped to $3.24 a gallon on Friday, down 11 percent from three months earlier and the lowest level in October since 2010, according to AAA. The motorist group predicts the price will fall below $3 in the coming months.

Analysts said such a drop would give consumers more disposable income.

"The discount stores, the middle tier retailer will benefit," said Chris Christopher, director at IHS Economics, adding that spending at higher end retailers is more closely connected to the stock market than prices at the pump.

Spending on gasoline accounts for a much bigger chunk of the budget in lower-income brackets. A household making between $20,000 and $30,000 spends about 8 percent of income on gas, while a family bringing in more than $70,000 a year spends about 3 percent, IHS estimates.

If the average gas price settles around $3.10 to $3.20 through the spring, that could unlock $35 billion to $50 billion in total savings for U.S. consumers during the next 12 months, investment bank Cowen estimates. Given that tailwind, Cowen predicted that the stocks of discount apparel retailers TJX Companies and Ross Stores were poised to gain.

Gilford Securities raised its rating on Wal-Mart on Friday to "buy" from "neutral." Analyst Bernard Sosnick didn't cite cheaper gas as a factor behind the upgrade, but he said it could help Wal-Mart claw back some business lost to more centrally located dollar stores in recent years.

"It's a significant factor for Wal-Mart because supercenters are often located a distance from shoppers, and when gas prices are high they tend to seek out more convenient locations," Sosnick said.

Less expensive gas is no panacea for the retail industry. Higher food prices and tepid wage growth are among the factors that could temper any sales bump generated by lower prices at the pump, analysts and economists said.

Adjusted for inflation, the average hourly earnings of production and nonsupervisory employees came to $8.85 in August, up just 7 cents from the same month a year earlier and lower than in August 2010, data from the Bureau of Labor Statistics show.

For some investors that's reason enough to stay away from Wal-Mart shares. The stock rose 0.6 percent to $78.29 on Friday but is still down about 2 percent since mid-May 2013 when it announced the first of six straight quarters of falling or flat same-store sales in the United States. During the same period the S&P 500 index has gained 2 percent.

"Wal-Mart shoppers have not seen wage gains in a long time, so they don't have a lot more money to spend," said Michael Farr, president of Farr, Miller & Washington. "When you see the consumer have wage gains Wal-Mart will start to do well." (Reporting by Nathan Layne; Editing by Jilian Mincer and Leslie Adler)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below