Tuesday, August 16, 2005

Target-Envy and Inflation in Our Time


Wal-Mart’s earnings call just ended, and, as usual, it contained an interesting—although too brief—snapshot of the world’s economies and some insight into the rising cost of doing business at the world’s largest retailer.

In the U.S., “summer did arrive” after an unusually cool and wet spring dampened sales. Germany is weak, as is the U.K. But China sales were up 20% and operating profit there was above plan and the company sounded very optimistic about new store openings there.

Interestingly enough, Wal-Mart in the U.S. is making an effort to attract more customers in Target’s middle-to-upper economic space, noting a large push into digital televisions. After a year or two of sub-par comp-store sales, Wal-Mart is clearly suffering “Target-envy”—a highly unusual turn of events for long-time retail watchers such as myself.

The culprit appears to be Wal-Mart’s lower-income customer and the toll higher oil prices are taking: energy “impacts an important portion of our customer base,” as the company noted several times on the call.

Energy also (somebody should tell the economists who subtract energy from the various price indices) hurts Wal-Mart itself: total utility costs “were up $100 million in the quarter,” while “the cost to move freight from our distribution centers to our stores” jumped $30 million in the quarter.

Bad for Wal-Mart? Not particularly, given that it’s spread over a quarter-trillion in sales.

But it sure makes things tougher on the little guys.


Jeff Matthews
I Am Not Making This Up



The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

15 comments:

billyjoerobidoux@yahoo.com said...

dd

Its_strange said...

Don't worry , some offer free shipping !

Bamass said...

All right, so let's say we make fuel costs part of the inflation figure. How exactly does that help? If we convince the Fed to gun the funds rate to 6% will that bring down the price of oil?

Alex Khenkin said...

Bamass, actually, it may - if (very likely) 6% rate causes a resession. Not that I advocate it, just to answer your question...
-Alex.
http://smallinvestorchronicles.blogspot.com/

cdub said...

It's always easy to blame external factors for less than stellar results. What about poor merchandising decisions? Ineffetive marketing? Bad/poorly timed pricing decisions and discount programs?

Dan said...

Rising gas prices are a legitimate concern. It's not like they blamed the death of the pope or a hurricane.

Prudent Investor said...

watch up!! When a domestic multinational starts to emphasize their foreign growth rate (especially from China), things are REALLY slowing in the domestic side. It happens all the time. Two blaring examples are Viacome and Ebay both emphasized their foreign operations before dropping the shock that domestic growth is slowing several quarters later. WMT is also using oil and an additional obsfucation tool. How would they know it's oil that is impacting consumers? What about their million dollar home they just bought with 0% down along with that spanking new Beamer that cost them $800 more a month? Oil is an easy excuse, dig deeper and you may find consumers exhausted. WMT is America, and as WMT goes, so goes the consumers!

Alex Khenkin said...

I second Grizzly - remember KKD blaming Atkins? When sales are up, it's the Management doing its job; when sales are down - it's the Economy, Gas Prices, Atkins, Weather, Whatever.
-Alex.
http://smallinvestorchronicles.blogspot.com/

mamis said...

On a marginally relevant note, this is one of the reasons I like Dell so much. They screwed up pricing. On their call, management said, "We screwed up pricing." No blaming the economy, weather, oil prices, short sellers, etc.

Disclaimer: I'm long Dell.

Stuck_in_Sarasota said...

Jeff,

Last week you mentioned an interesting story about fuel supply bottlenecks at airports in Calif., Arizona, and Nevada.

Didn't know if you had seen this yet - there was a story in today's Las Vegas Review-Journal about it:

http://www.reviewjournal.com/lvrj_home/2005/Aug-16-Tue-2005/news/27058578.html

Shortage of fuel looming in valley

Rory Reid to call for special committee to address problem
By CHRIS JONES
GAMING WIRE

As increasing numbers of residents and visitors stretch the limits of Southern Nevada's inbound fuel network, leaders are planning to discuss what options might best prevent local cars, trucks and planes from running on fumes.

Clark County Commissioner Rory Reid said Monday that early next month he'll call for the formation of a special committee to address how to avert pending fuel shortages for drivers in the Las Vegas Valley, as well as the many aircraft that form the lifeblood of the local travel industry. Unless action is taken, serious shortages could arise as soon as two years from now.

Potential solutions include building a new $400 million fuel pipeline from Southern California, increasing local fuel storage capacity and adding a so-called "second straw" that would connect Las Vegas to fuel supplies in Arizona, Utah or Northern California.

"We need to do something before it's a crisis," Reid said from his sixth-floor office at the Clark County Government Center.

The Las Vegas Valley gets almost all of its gasoline from a 14-inch pipeline that runs from Colton, Calif., to a fuel terminal that Houston-based Kinder Morgan Energy Partners operates near the main entrance to Nellis Air Force Base. Tanker trucks load up there before delivering various gasoline products to local service stations.

A second 8-inch pipeline brings jet fuel directly from Colton to McCarran International Airport, though the airport can also draw directly from Kinder Morgan's North Las Vegas terminal using another 8-inch pipeline that runs beneath the Las Vegas Valley.

Both the 14-inch and 8-inch Cal-Nev pipelines from Colton are nearing their ultimate capacities, Clark County Aviation Director Randall Walker said Monday, approximately 10 days after he discussed local fueling needs with representatives of Kinder Morgan.

The 14-inch line is now pumping 96,000 barrels per day, which is close to its 105,000 barrel daily capacity, Walker said.

In addition, the 8-inch line to McCarran is carrying 26,000 barrels per day; its daily limit is 27,000 barrels. One barrel equates to approximately 42 gallons.

While McCarran has a five- to six-day reserve stored on-site, storage tanks at Kinder Morgan's local depot are usually empty despite having a 3 1/2-day capacity. And demand continues to grow.

McCarran will this year handle between 43 million and 44 million passengers, up from last year's record total of nearly 41.5 million, Walker said. Based on current growth models, he estimates the airport will exceed the 8-inch line's limits by approximately 7 percent just two years from now.

Short-term fixes, including booster pumps and asking planes to sometimes fill up elsewhere, are available, but Reid said they won't address the valley's long-term needs.

Southern Nevada's gasoline retailers have regularly struggled through shortages in recent years.

Sean Higgins, general counsel for the Terrible Herbst Oil Co., on Monday said many of his company's 90 local stations ran dry two weeks ago after a 14-hour interruption to the Colton pipeline. Such problems will only worsen, he added.

"This is not a Terrible Herbst problem; it's the valley's problem," Higgins said. "None of these (recent interruptions) have been catastrophic to date, but what if one was? We're in trouble in this valley."

Gasoline can still be trucked here whenever the Colton pipeline is down, but Higgins said that step typically costs retailers an additional 7 cents to 8 cents per gallon -- costs that are passed on to consumers at the pump.

"And that's if you've got enough trucks to get it here, which you probably don't," Higgins added, dispelling any notion that trucking would offer an attractive long-term solution to local needs. McCarran alone uses close to 1 million gallons of jet fuel a day, Walker said.

"There's no way that you can deliver that much gas any other way than a pipeline," Walker said, adding tanker trucks typically carry about 9,000 gallon loads. Rail-based tankers are also a short-term solution, at best.

Higgins said Terrible Herbst hopes to participate in Reid's proposed committee, which Walker said will probably include gasoline retailers; representatives of the local resort industry and the Las Vegas Convention and Visitors Authority; airlines operating at McCarran; elected officials, including members of Nevada's congressional delegation; as well as Kinder Morgan.

To prevent a bureaucratic bog down, Clark County Manager Thom Reilly hopes the committee will include no more than 10 members.

Reid will raise the issue when the commission meets Sept. 6; he hopes the committee will be formed by the end of next month.

Other fuel-related questions that must be addressed include the viability of a third Cal-Nev pipeline; how much fuel should be kept in reserve locally; and whether Southern Nevada leaders should pursue a new pipeline to the north or east.

Earlier this month, The Arizona Republic newspaper reported Kinder Morgan plans to spend $130 million to upgrade an existing 12-inch pipeline between Phoenix and El Paso, Texas, with a modern 16-inch pipeline.

The company is already at work on a $210 million project to install 16-inch segments from El Paso to Tucson, Ariz., as well as a 12-inch pipeline from Tucson to Phoenix.

Those improvements are expected to boost gasoline supplies in the Phoenix area by more than 40 percent. Looking long-term, the extra pipe space could also form the basis for another Southern Nevada supply line, should an extension from Phoenix to Las Vegas prove feasible.

David Hackett, president of Stillwater Associates, an energy consulting company in Irvine, Calif., on Monday described the valley's existing fuel supply network as a "leftover from when Las Vegas was a little town."

Local leaders must work to improve it, just as they've added new freeways, water supply systems and electrical capacity.

"The place is growing like crazy," Hackett said. "You have to keep up with the demand, and it takes infrastructure to do it."

Hackett also believes adding a pipeline from someplace other than Colton could produce small reductions in Las Vegas gasoline prices, which have recently ranked among the nation's highest.

"Phoenix gets its gas from New Mexico, Texas and California, so from time to time there tends to be something of a price battle between refineries to the east and west," Hackett said.

Still, both Hackett and Higgins concede another pipeline would be just one component of consumer-level fuel costs. Other factors include crude oil prices; the number of service stations operating in a market; taxes; and environmental considerations such as Southern Nevada's wintertime requirement for a 10 percent ethanol blend to lower seasonal air pollution.

Jeff Matthews said...

"Stuck in Sarasota": that is one of the most interesting articles about this issue I've seen.

Thanks for posting it.

DaleW said...

Contrarian viewpoint on Jeff's take on inflation:

Gasoline is about 3.5% of personal consumption and power utilities are about 3.5% to 4.0%. These are manageable, in my mind. It will bite into consumption elsewhere, but will it blow up the consumee or throw the average person into a stupor?

Here's an interesting analogy: Auto insurance is about 2.8% of PCE and that has gone up by about 30-40% over four years. I haven't seen anyone pin the whole economy on that.

Here's what Wal-Mart CEO Lee Scott Jr. said yesterday about inflation: "If you think about inflation, based upon in total pricing analysis and which at Wal-Mart we have a broad base to compare against, inflation in the United States appears to be well under control. A Wal-Mart customer who bought a basket of goods this year paid just about the same for that basket as they did last year."

Yes, they're worried about the pinch energy will put on the pace of employment growth and spending, but I personally wonder why everyone isn't as up in arms about runaway auto insurance and why that will chill the economy to the same extent they are up in arms about the effects of energy prices.

observer said...

I've been watching Wal-Mart's Target envy for the past year and have noticed a couple key (and probably obvious)points.

1. The shoppers at Wal-Mart and Target are not demographically interchangeable.
2. The Target shoppers are more comfortable going to Wal-Mart than the reverse.

So maybe the advantage belongs to Wal-Mart? (hate to say this since I really like to shop at Target)

Dean said...

The article posted by SiS is interesting. I can't find the location of an article I read a couple days ago about gas shortages in China. WSJ, NYT...hell, it could have been The Enquirer. Apparently, the Powers That Be in portions of the country are restricting the quantities allowed to any one consumer to the equivalent of around six dollars US. This reminds me of the situation in the late seventies when, as a high schooler working at The Mobil Station on the west bound lane of the Massachusetts Turnpike (just east of exit 7), we endured angry folks waiting in line for hours to acquire three bucks worth (count 'em!) of petrol. We are one small catalyst away from reliving that scenario and never having to hear another CNBC mouthpiece chirp how oil is STILL not as expensive as it was "back then" when adjusted for inflation.

Stuck_in_Sarasota said...

Dean,

I have seen similar stories about gasoline shortages in China. The Calgary Herald ran an article today about it. Apparently, half of all gas stations in the manufacturing city of Guangdong (sp?) are closed right now, due to these shortages.