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Taking the Energy Out of Retailers

Stock in both Wal-Mart Stores Inc. and J.C. Penney Co. fell after the retailers released their second-quarter earnings yesterday.
Stock in both Wal-Mart Stores Inc. and J.C. Penney Co. fell after the retailers released their second-quarter earnings yesterday. (By Bradley C. Bower -- Bloomberg News)

The chain's customers, whose average household income is about $30,000 -- compared with $45,000 at Wal-Mart and $55,000 at Target -- are simply running out of money at the end of their paycheck cycle. Gas "is becoming a bigger portion of their overall spending, and the pie is not getting any bigger," Rawlins said.

Wachovia Securities estimates that a 30 percent increase in gas prices reduces discretionary spending by $243 for the average discount-chain shopper. Gas prices are up 36 percent this year, the firm found.

At J.C. Penney Co., where the customer base overlaps heavily with that of Wal-Mart, chief executive Myron E. Ullman III said he is "concerned about it. We've been surprised so far that it's been pretty much absorbed by the consumer," he added, "but we can't expect that to continue forever if it keeps going up."

Even companies that specialize in expensive electronics, such as Best Buy Co., are feeling the squeeze. The chain has blamed a lower customer count in its stores on shoppers who are worried about gas prices.

Tracy Mullin, president of the National Retail Federation, an industry trade group, called the rising fuel prices a "a double whammy for retailers. They are having to absorb the higher cost of gasoline in their everyday operations, and their consumers are spending more money to get to the stores."

Wal-Mart said higher fuel prices pushed its utility expenses up by $100 million and freight costs up by $30 million during the second quarter. J.C. Penney, meanwhile, blamed higher oil and gas prices for an additional $7 million to $10 million in costs over the past year.

Wal-Mart's second-quarter profit rose 5.8 percent, to $2.8 billion. Revenue rose 10.2 percent, to $76.8 billion. But its stock fell $1.53 to $47.57 after yesterday's report. J.C. Penney had a profit of $131 million during the quarter on revenue of $3.98 billion, up 5.4 percent. Its stock fell $2.16 to $49.74.

Most retailers are eating the costs of higher fuel rather than raising prices.

"We are investing in our customers to stay competitive," said Greg TenEyck, a spokesman for Safeway Inc., which said its transportation costs have surged.

That is scant relief for shoppers such as Franklin Crawford, who spends $45 gassing up his 2002 Ford Explorer. He saw a $39 mattress cover he liked at Bed, Bath & Beyond but opted instead for a $12 version he found at Wal-Mart.

He walked out of the Wal-Mart in Alexandria yesterday carrying a McDonald's Quarter Pounder and french fries, along with the mattress cover.

Crawford used to pay at least $8 to sit down and eat at his favorite buffets, but with gas prices escalating, he has downsized to McDonald's.

"My hamburger is my steak," he said, "my french fries are my caviar."

Researcher Richard Drezen contributed to this report.

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Estimated impact of gas prices on August sales:
Graph: Effect on potential sales in percentage points, by store or store type
SOURCE: International Council of Shopping Centers | THE WASHINGTON POST
© 2005 The Washington Post Company