February 8, 2008

Walmart Gift Cards as a Barometer of the Economy?

Yesterday, Wal-Mart announced that their same-store sales rose only 0.5 percent in January, significantly lower than the expectation of a 2.0 percent increase. However, what was more surprising was that Walmart attributed the poor sales performance to poor gift card redemption. Specifically, consumers were spending gift cards on basic staple items, such as groceries and diapers, instead of on discretionary items, such as on electronics and DVDs.

Downward Walmart
The question is whether consumers’ gift card spending behavior is indicative of the economy’s poor health. Unfortunately, this could possibly be a such sign.

Wal-Mart’s gift card sales were strong during the past holiday season. Retailers only book revenue from gift cards when the cards are redeemed. Therefore, Wal-Mart was expecting consumers to redeem those gift cards in January. Unfortunately, consumers redeemed the gift cards at lower rate than anticipated and also failed to spend more than the face value of the gift cards. These factors plus bad weather in the Midwest contributed to Wal-Mart’s poor January same-store results.

However, the fact that consumers are spending gift cards, typically considered “free” money, on basic necessities is very discouraging to economist. By shifting gift card purchases from “nice to haves” over to “must haves”, consumers are tightening their belts and becoming cautious about the economy’s overall health. If consumers continue to exhibit this behavior with the tax rebate checks coming out in May, then its going to take a lot more than rebate checks to get the economy back on track.

Stores Post Disappointing January Sales [AP Newswire]

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