Is Income Inequality Hammering Wal-Mart?

To its many critics, Wal-Mart symbolizes every ruthless company that sticks it to workers with low wages and lousy benefits. The ginormous retailer is sure to be a frequent target for Democrats during the 2008 presidential election. (Back in November, Barack Obama and John Edwards took part in a conference call urging the company to "put families first.") But it gets worse.

According to a new theory floating about, Wal-Mart additionally symbolizes income inequality and wage stagnation in America. (This was a topic I chatted about last night on CNBC's Kudlow & Co.) The theory goes like this: For the past two years, Wal-Mart same-stores sales have risen at just 3 percent annually. In December, they rose by just 1.6 percent, compared with 9 percent at upscale Nordstrom.

Plus, Wal-Mart stock has been flat in recent years. Why? Because the rich are getting richer in America, and the poor are getting poorer. That means Wal-Mart's downscale customer base is under tremendous stress. And since the theorists partly blame Wal-Mart itself for this state of affairs, it's like economic karma. At least, that's the theory. But consider this:

1) The same crowd backing this theory has been forwarding the "rich getting richer, the poor poorer" theme for 25 years. Yet Wal-Mart has somehow managed to prosper. Its stock rose from around 12 cents in 1980 (adjusted for stock splits) to $70 by 2000. Why has Wal-Mart only now become a barometer for the state of the lower-middle class? To be consistent, you would have to conclude the working American had been doing just fine for the previous two decades, given Wal-Mart's amazing success.

2) While the rich are getting richer, so is everyone else–just not as fast. According to a recent report from the nonpartisan Congressional Budget Office, the top fifth of households saw their after-inflation, after-tax income grow by 69 percent from 1979 to 2004, with the top 1 percent–full of CEOs and movie stars and pro athletes– seeing their incomes grow by 179 percent. (One explanation is that globalization has now created a global market for the skills–though in the case of Paris Hilton, I use that word loosely–of this elite and thus greater financial rewards.)

How did the rest of us do? Despite all the talk of wage stagnation, the second quintile saw its incomes grow 29 percent, the third quintile 21 percent, the fourth quintile 17 percent, and the fifth quintile 6 percent. And this all assumes that the government is accurately gauging inflation. As I noted in this story on income inequality, government inflation statistics may be overstating rising prices by about a percentage point a year, failing to take into account the rising quality of goods and the ability of consumers to shift to Wal-Mart when prices go up at their local supermarket. If true, earnings have actually risen by a third more during the past quarter century.

3) Ask Wall Street's Wal-Mart analysts about the company's troubles in the past few years, and income inequality is pretty far down the list, if it appears at all. A recent Citigroup analysis is typical. Here is what it lists as the company's big problems:

Wal-Mart's size may hinder both sales and earnings growth in the future. ... Wal-Mart is a high-profile target for lawsuits. At any given time, it is subject to class action and other lawsuits that could carry considerable costs and impact to earnings. ... Continued negative coverage by the media is creating 'headline risk' that can damage Wal-Mart's brand image. This affects Wal-Mart's ability to expand into new areas, to retain high-quality employees, and to attract new customers.

There's nothing about the finances of its customers. These Wall Street guys are far more worried about Wal-Mart's ugly stores and lousy PR.

4) Would Wal-Mart love to go more upscale? Sure, the company has said as much. As Wharton Business School marketing Prof. Xavier Drèze has explained, "They have expanded to the point where they can't expand in the U.S. anymore. If you can't grow by reaching more people, you have to grow by selling more–and more expensive–[merchandise]." This is also why the company so desperately needs to expand overseas.

So what if Wal-Mart turns things around? Will its critics now hail the company as an example of growing income equality in America?