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Wal-Mart Has a Hard Time Fighting The Stiff Market Competition

August 17, 2014 | About:

The world's largest retailer is having a hard time returning to growth and doesn't expect sales to improve in the U.S. for much of the rest of the year. Wal-Mart Stores Inc. (NYSE:WMT) cut its earnings guidance for the year after it posted its seventh straight quarterly decline in U.S. store traffic and said growth in online sales would slow. It cited sluggish consumer spending and higher costs associated with building new smaller-format stores, increased health-care expenses, and greater investments in its e-commerce operations.

Sales excluding newly opened or closed stores in the U.S. were flat. That was a mild improvement after five straight quarters of declines, but nevertheless underscored the challenges facing a division that made up 60% of the retail giant's $476 billion in revenue last year yet hasn't seen positive comparable-store sales since 2012. "We wanted to see stronger comps in Wal-Mart U.S. and Sam's Club," Chief Executive Doug McMillon said. "Stronger sales in the U.S. businesses would've also helped our profit performance," he added. For the three months ended July 31, Wal-Mart posted a profit of $4.09 billion, up a hair from $4.07 billion a year earlier. Revenue rose 2.8% to $120.1 billion. Meanwhile, Wal-Mart's core low-income customers continue to struggle with depressed wages and cuts in government benefits.

One unexpected jolt to the gross income came from health care, where costs are raising quickly as more employees sign up for coverage. The company said it now expects to shell out an additional $500 million in health-care expenses related to increased employee enrollment and higher costs, up from the $330 million in increases it originally expected.

"Health-care costs increased approximately $180 million versus last year and were well above our initial estimates," said Wal-Mart U.S. CEO Greg Foran, who stepped into the role this week following the departure of Mr. Simon.

The company said it now expects full-year earnings of $4.90 to $5.15 a share, down from its previous range of $5.10 to $5.45 a share. U.S. comparable-store sales in the three months ending Oct. 31 should be relatively flat, the company said.

Mr. Foran, who has never worked in the U.S., joined Wal-Mart in 2011 after being passed over for the top job at Woolworths Ltd. in Australia. He served as president of Wal-Mart China, where he presided over the company's expansion as it tangled with compliance issues and government regulation, and was appointed head of Wal-Mart Asia in April.

Wal-Mart said it continued to spend on compliance costs, including $43 million on costs related to a continuing investigation into alleged violations of the U.S. antibribery law and changes to its global compliance program. It also added more labor hours for employees in the front end of the store, as well as overnight stockers and bakery workers, bumping up salaries and wages by $200 million from the year before.

Wal-Mart now expects to spend an additional 5 cents to 7 cents a share on e-commerce, including building a new distribution center this year in Indiana. It previously said it expected to spend an additional 2 cents to 4 cents a share.

The company also cut its online sales growth projections for the year to "mid-20s" from 30%. Its online sales, as well as its smaller-format grocery stores, have been among the few positive sales drivers for the company. During the quarter ended July 31, global online sales grew by 24% and contributed 0.3 percentage point to Wal-Mart's U.S. sales, excluding newly opened or closed stores. Wal-Mart brought in $10 billion in online sales last year.

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