By Karen Talley
Dollar stores and other retailers catering to lower-income
consumers face the greatest risks if the U.S. falls off the fiscal
cliff.
Stores targeting the more affluent, meanwhile, would feel little
pain as the country grapples with the higher taxes and deep
government spending cuts scheduled for Jan. 1 if Washington doesn't
agree to a new budget bill.
If the payroll tax cuts put in place in late 2010 are allowed to
expire at the end of the year, Morgan Stanley says retailers like
Dollar General Corp. (DG), Dollar Tree Inc. (DLTR) and Family
Dollar Stores Inc. (FDO) could face a drop of 1% to 2% in
comparable-store sales and a six cents to 10 cents a share loss in
earnings per share in 2013.
"We estimate the payroll taxes deduction would decrease
discretionary spending capability by 6% for those that make less
than $40,000," Morgan Stanley said. "As most households at this
level spend all that is available to them, this should directly
come out of discretionary spending."
Lower-income consumers who frequent stores like Family Dollar
and Wal-Mart Stores Inc. (WMT) often live paycheck-to-paycheck and
would have less money for essentials and discretionary
purchases.
The threat prompted Wal-Mart Chief Executive Mike Duke to urge
Washington to act before the end of the year.
"In many ways, Wal-Mart's customers are at the center of this
debate," Mr. Duke said in a statement after he and other business
leaders met recently with President Barack Obama. "They are
middle-class Americans and those aspiring to join the middle class.
If the White House and Congress can reach agreement, it will show
them the nation's leaders can address big issues, and it will help
raise their confidence in their government and their future."
In its third-quarter earnings report, Dollar Tree in part blamed
the fiscal cliff for consumers pulling back on spending. Family
Dollar has said middle-income spenders would likely be trading
down, noting that sales for more discretionary items like new
clothing could suffer.
Morgan Stanley also expects off-price retailers like TJX Cos.
(TJX) and Ross Stores Inc. (ROST) to feel an impact given their
general exposure to lower-income consumers. Teen retailers like
Aeropostale Inc. (ARO) and Abercrombie & Fitch Co. (ANF) also
could be hurt because many of their young shoppers receive spending
money from their parents.
For upper-income consumers, the impact of higher taxes would be
less acute, an estimated 2% decrease in discretionary spending,
Morgan Stanley said. Women's apparel retailers like Ann Inc. (ANN)
and Chicos FAS Inc. (CHS), as well as upscale retailers including
Coach Inc. (COH), Nordstrom Inc. (JWN), Saks Inc. (SKS) and Tiffany
& Co. (TIF) are likely to see little to no impact, the bank
said.
Federal lawmakers are grappling with the fiscal cliff, a $500
billion package of spending cuts and tax increases that will go
into effect unless the White House and Congress negotiate an
alternative. If policy makers don't act before the end of the year,
the Congressional Budget Office said the economy would contract by
0.5% next year, and the unemployment rate would jump from 7.7% to
9.1%.
"We're finally getting to a point where people are coming back,"
said Tom Duncan, chief executive of Positec Tool Corp., a powertool
maker that sells through Home Depot Inc. (HD), Wal-Mart and Lowe's
Cos. (LOW). "The biggest fear by companies like us and retailers is
that it is going to be cut short."
Carl Steidtmann, chief economist at Deloitte, estimates that at
least $341 billion in spending power will be lost with the extra
payroll taxes, the loss of the Bush tax cuts and the
discontinuation of long-term unemployment benefits. "People will be
forced to cut back their spending, and that means a lot of retail,"
Mr. Steidtmann said.
Write to Karen Talley at karen.talley@dowjones.com
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