Payroll Tax Hikes Take a Bite Out of Wal-Mart’s Sales

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This article will discuss how the expiration of the payroll tax cuts, which were initially implemented in 2010 and were phased out as of Dec. 31, 2012, apparently affected Wal-Mart’s (NYSE: WMT) February sales and how this might be a yellow flag for the broader retail sector.

What is the Payroll Tax Rate for 2013?

The payroll tax rate, or FICA rate, is the combined social security tax rate of 6.2 percent and the Medicare tax rate of 1.45 percent. The Bush tax cut package cut the social security portion from 6.2 to 4.2 percent.

When Congress and the Obama Administration kicked the can on a budget compromise last year, the pay roll tax reduction was restored to 6.2 percent. Furthermore, the Social Security Administration announced last December that the Social Security wage base will increase this year to $113,700 from the 2012 base rate of $110,100. This is an increase of $3,600.

The bottom line: this year taxpayers began paying 2 percentage points more in Social Security taxes on their first $113,700 in wages. This is roughly $15 a week for those making $40,000 a year, and the increases may be dragging down retail sales.

 Wal-Marts’ February Sales Numbers Fall

Several news sources recently reported that Wal-Mart had weak February sales numbers and other retailers might be similarly situated. In fact, head honchos said in internal e-mails that month-to-date figures were a “total disaster.” This was the retail chain’s worst sales start since 2006.

The company’s shares fell by about 2% after the leaked emails floated to the surface in a story initially reported by Bloomberg News. In addition, this might not be good news for the retail sector. Combining the possible effect of the tax rate hike with rising gasoline and food prices means that discount retail customers at Wal-Mart and other stores might tighten their belts since take home pay has been dinged.

But the question remains as to whether or not shoppers will have less buying power for the rest of the year. And it’s not as if discount retailers have never seen consumers pull back. In such scenarios, one way to maintain market share is by offering deeper discounts that will keep consumers hopes alive and slow the falling sales numbers.

Given the lingering economic uncertainty, investors may use this as an opportunity to take some money off the table while resisting the urge to panic. Whether this is a small blip on the economic radar for 2013 or the beginning of a dip in the retail sector is unclear.

And some analysts noted that other retail outlets like Family Dollar Stores (NYSE: FDO) and Target (NYSE: TGT) may also be feeling the pain.

Target - the retail outlet that sells everything from clothes to home goods to groceries - reported a solid 3.1 percent increase in revenue in January. That was boosted in part because of solid sales of clearance items. The figure also beat the 1.7 percent estimate of some analysts. The February sales figures should be available on March 1, so investors will have a better idea as to if the payroll tax hike affected its sales.

In an appearance on CNBC’s Squawk Box last week Family Dollar's chief said that the payroll tax hike should not be a “major challenge” for the retailer’s business. While the next earnings announcement is not until April 10, 2012 earnings per share were $3.65 and estimates for first half of 2013 are $3.98. This gain might not factor in the payroll tax hike figures, but it does not appear that the bogey man of return to normal payroll deductions will be an impediment.

In other words Wal-Mart’s competitors may not be feeling the pain, and that outfits' February sales slump may be a reflection of other challenges besides the payroll tax hike like customer service and its business model in general.

Wal-Mart Q4 Earnings

Wal-Mart reported that sales rose 1 percent in the fourth quarter of FY 2012. The company had forecast an increase of 1 percent to 3 percent. In the same period in 2011, Wal-Mart's U.S. same-store sales rose 1.5 percent. The retailer also earned $5.61 billion, or $1.67 per share (up from $5.19 billion or $1.51 per share a year earlier).

Moreover, the retail outfit spent $157 million last year on an internal probe of its major Mexican unit that surfaced in April 2012. The company said its forecast includes about $40 million to $45 million in first-quarter costs related to Foreign Corrupt Practices Act and other compliance matters.

So, the Q4 numbers are actually a bit better than analysts’ projections, and it’s too early to determine what the rest of 2013 has in store Wal-Mart. Meanwhile, investors and retail buyers alike should proceed with caution.

kcolona has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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