Health Costs, Weak Store Traffic Hinder Wal-Mart
August, 14, 2014
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. (WMT -0.66%) 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.”
A rough streak of results from retailers is raising concerns about the health of the consumer as the economy chugs through the second half of the year. The bad news came not just from Wal-Mart, but also from Macy’s Inc. (M -0.67%), Michael Kors Holdings Ltd. (KORS -0.41%) and Kate Spade & Co. (KATE +0.29%), companies that until recently had weathered the weak demand and heavy discounting that have plagued the industry. The Commerce Department said Wednesday that spending at U.S. retailers was flat in July.
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.
Wal-Mart investors had low expectations going into Thursday’s report. The departure of U.S. chief Bill Simon earlier this month had stoked concerns that efforts to improve store merchandise and operations hadn’t managed to materially boost sales. Meanwhile, Wal-Mart’s core low-income customers continue to struggle with depressed wages and cuts in government benefits.
“Our customers are still under pressure,” Chief Financial Officer Charles Holley said. “They are concerned with their cost of living and employment.
Shoppers like Jessica Manzanares, 28 years old, continue to pinch pennies. “All the prices are going up on gas, food, school supplies,” said the mother of three as she compared notebook prices at a Wal-Mart store in Denver. “Notebooks used to be 97 cents, now the ones my boys want are $2.47.”
This year Ms. Manzanares is comparing school-supply prices between the dollar store chain where she is an assistant manager and a nearby Wal-Mart. “It’s a little bit cheaper here, and a penny here and there adds up.”
One expected headwind came from health care, where costs are rising 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 October 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. (WOW.AU +0.06%) 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.
“We grew faster than the market, but we didn’t grow as fast as we wanted to,” said Neil Ashe, who leads global e-commerce at Wal-Mart.
Source: The Wall Street Journal
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