The market carnage of the past week has been indiscriminate—big stocks, small stocks, tech stocks, old economy stocks. You name it. The sell-off is happening in part because China is weak. And that’s bad news for U.S. investors. And they’re getting poorer, that eventually could be awful for the American economy at large. All this weakness—in China, in the U.S., everywhere—is in turn bad for commodities and stocks. That logic is especially germane for companies that get a lot of their sales from China’s aspiring consumers—like, say, Apple, or BMW, or Tesla—and for rich stock-holding people in the U.S.
But what if you’re on the other side of this trade. What if you’re a company that benefits when economic conditions in China weaken and whose core U.S. customers don’t have wealth in stocks and experience the commodities slump chiefly as a tax cut.
Well, you’d be Walmart.
Walmart, the largest U.S. retailer and the largest private-sector U.S. employer, sure doesn’t seem like it’s benefited from recent developments. For the past few months, it has been underperforming the S&P 500, in part because of a disappointing profits report. And in the past few days, it has swooned along with the rest of the market. (Here’s the six-month chart of Walmart vs. the S&P 500.) It’s lost about a quarter of its value since February.
There’s a case to be made, however, that the events of the past week are actually good for Walmart. One of the events that precipitated the recent round of selling was China’s move effectively to devalue the yuan. But Walmart’s big box stores are effectively conduits for goods—kitchen utensils, toys, diapers, clothing—made in China and other emerging markets, some of whose currencies have also fallen lately. The devaluation of the yuan and other currencies means Walmart, which purchases goods in dollars, will be paying significantly less for a lot of the products it sells going forward. In an industry that runs on thin margins (in the most recent quarter, Walmart’s net income was about 3 percent of sales), that’s a significant boost.
At the same time that it’ll be paying less for goods, the capacity of its core customer to spend is actually rising. The decline in the stock market will put a halt on some high-end spending. (Something tells me it is going to be a quiet weekend at the newly opened Maserati of Westport, Connecticut.) In 2010, the top 10 percent of Americans held about 80 percent of stock wealth. (The proportion is surely higher now.) About half of Americans don’t own any shares. In 2012, Reuters reported, Walmart core customers were Americans with incomes between $30,000 and $60,000. The typical Walmart consumer depends on wages—not dividends and capital gains—for consuming power. That customer is much more sensitive to changes in gas prices than to changes in the price of oil stocks.
And with oil having fallen to less than $40 a barrel as part of the China-led market rout, the cost of gasoline is plummeting. According to AAA, gas costs about $2.60 per gallon now, down about 25 percent from a year ago. The falling price of gasoline is putting extra spending money in the pockets of all Americans. But the falling price in this fixed cost is a particular boon to people on the lower end of the income scale, for whom an extra $10 or $20 to spend weekly is real money.
Walmart has been getting some sales momentum, in part because of the underlying factors that support its business model—persistent job gains, a slowly rising floor under wages. In the most recent quarter, same-store sales, the key metric for retailers, actually rose 1.5 percent for Walmart’s U.S. stores.
So for now—at least until the stock market weakness starts to spill over into the real economy—the carnage contains some good news for Walmart. The cost of its goods will fall, and its core customers will show up at its stores with more cash.