Hope Dims for Wal-Mart’s Effort to Ignite Growth
In cutting sales forecast, retailer cites recently announced store closures, stronger U.S. dollar
Wal-Mart has been spending heavily to get customers back into its stores. In the holiday quarter, sales at Wal-Mart’s existing U.S. stores ticked up 0.6%, marking the sixth straight quarterly gain after a long stretch of declines. PHOTO: ZUMA PRESS
Wal-Mart Stores Inc. on Thursday cut a sales forecast made four months ago, surprising investors again and dimming hopes that heavy spending on upgrading its stores, e-commerce operations and wages will bring quick growth.
Sales for the current fiscal year will be “relatively flat,” Wal-Mart said in its earnings release, a downgrade from October when executives predicted sales growth between 3% and 4%. It is the latest in a string of repeated forecast cuts by the retailer.
Wal-Mart said the downgrade wasn’t because of sales trends, but reflects the impact from recently announced store closures around the world, as well as the continued strengthening of the U.S. dollar. Excluding the impact of currency impacts and store closures, the retailer said the sales-growth forecast would have held steady.
The weaker sales forecast didn’t add clarity to a retail picture that has remained murky over the past year. While the U.S. consumer seems to be strengthening, benefiting from higher wages, lower unemployment and cheap gasoline, many big retailers are struggling with fundamental changes in shopping habits.
The company’s shares were down 3% at $64.12 on the New York Stock Exchange.
The reaction is evidence of the high-wire act Wal-Mart Chief Executive Doug McMillon is performing in asking investors to accept lower profit in the short-term for a better outcome in the future. The Bentonville, Ark.-based retailer is spending heavily to improve stores and boost e-commerce sales in its fight against stiff competition from the likes of Amazon.com Inc., grocers such asKroger Co. and smaller retailers including dollar stores, but at a cost to profitability.
Wal-Mart says the plan is working. Sales at Wal-Mart’s existing U.S. stores rose for the sixth-straight quarterly gain after a long stretch of declines but only ticked up 0.6%, short of analysts’ forecasts of a 1% increase, according to Consensus Metrix. The quarter, ended Jan. 31, included the important holiday shopping period. The number of people visiting Wal-Mart’s stores rose 0.7%, the fifth-straight quarterly increase.
Inventory levels have fallen and customer-satisfaction scores are improving, according to Wal-Mart executives, and store-employee turnover has fallen in the wake of wage increases. After raising theminimum U.S. hourly wage to $9 last year, the company will boost it further to $10 on Saturday for most of its one-million-strong store employees.“We do see an underlying strength in our Wal-Mart U.S. business that wasn’t there a year ago,” Mr. McMillon said Thursday. “This past year has been a year of investment, operational improvement and change.”
In all, Wal-Mart posted an 8% drop in fourth-quarter profit to $4.57 billion from the year-earlier period. Revenue fell 1.4% to $129.7 billion, below analyst forecasts for $130.96 billion.
Wal-Mart is contending with external headwinds. Executives said the strong U.S. dollar and falling prices of meat and dairy took a bite out of revenue, and executives also cited a delay in Internal Revenue Service tax-refund checks in late January and warm winter weather.
“While customers benefited from lower gas prices, we experienced significant headwinds from deflation,” said Wal-Mart U.S. Chief Executive Greg Foran on a prerecorded call to discuss earnings. Mr. Foran expects deflationary pressure to continue through the first quarter of fiscal year 2017, he said on a later call with reporters.
In response to shifts in consumer habits, Wal-Mart is spending more than $5 billion on several initiatives including wage increases, e-commerce development and steps to lower prices, a necessary measure for a retailer that relies heavily on low prices to draw shoppers. According to annual surveys from Kantar Retail, a research and consulting firm, Wal-Mart’s reputation for having the lowest prices is eroding. In 2015, 22% of shoppers said Wal-Mart had the lowest prices for food, compared with 25% in 2011.
“The results demonstrate the need for the investments they are making,” said Robert Drbul, retail analyst at Nomura Holdings Inc.
Wal-Mart’s e-commerce sales continued to decelerate, rising 12% in fiscal-year 2016, compared with a 24% increase the previous year. Executives pointed to a weak economy in Brazil and China and strong competition in the U.K. for the slowing figures.
For the 12 months ended Dec. 31, Amazon.com’s North American sales jumped 25% to $63.7 billion. “That is clearly impacting Wal-Mart,” said Mr. Drbul.
