Wal-Mart's profit slips 7%

Quarter misses forecasts; currency swings, wage rise cited

Bentonville based Wal-Mart posted lower earnings for the second time this year.
Bentonville based Wal-Mart posted lower earnings for the second time this year.

Wal-Mart Stores Inc. missed earnings estimates for the first quarter of its 2016 fiscal year and saw profit decline nearly 7 percent, primarily as the result of currency fluctuations and investment in its U.S. workforce, the retailer said Tuesday.

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Arkansas Democrat-Gazette

Graphs showing Wal-Mart Stores Inc. first quarter information.

Revenue for the quarter was $114 billion, down 0.1 percent from the same quarter last year. Income of $3.34 billion, or earnings of $1.03 per share, was also down from a year ago when Wal-Mart reported earnings of $3.6 billion and $1.11 per share.

Earnings were on the low end of guidance issued by Wal-Mart earlier this year and below the $1.04 projected by analysts surveyed by Yahoo Finance. Analysts for Wells Fargo also were projecting earnings per share of $1.04, according to a research note that described the first quarter performance as "softer than expected."

Investors did not react positively in the immediate aftermath of the first-quarter report, which chief executive Doug McMillon described as "solid" in a call with investors. Shares fell $3.49, ending the day at $76.43, down considerably from the 52-week high of $90.97.

Despite the earnings and revenue misses, the retailer reported continued increases in sales and traffic for its U.S. division. Wal-Mart U.S. is the largest segment of the company and is responsible for about 60 percent of the retailer's net sales.

Domestic same-store growth was up 1.1 percent, the third-consecutive quarter of growth. Traffic also increased by 1 percent and the company reported U.S. sales of $2.4 billion, up 3.5 percent from the same quarter last year. Lower gas prices apparently had little effect on spending as consumers looked to save or pay down debt.

"It was kind of weak, a little bit disappointing to be honest," said Brian Yarbrough, retail analyst for Edward Jones. "With the wage increases, more labor in the stores and all the things they're doing, they can no longer get leverage and grow operating profits faster than sales on 1 percent comps. It wasn't a bad number, you just can't leverage earnings off of that."

"Comps," or comparable store sales, is an industry term for same-store sales.

Wages for about 500,000 domestic Wal-Mart employees increased in April as the minimum wage paid by the retailer rose to $9. Wal-Mart's first quarter ended May 1 and the increase in wages had a 2-cent-per-share effect on earnings, the company reported.

Wal-Mart is investing $1 billion this year in wage increases and other employee-focused initiatives. Scheduling and training programs also are part of the investment, which is aimed at increasing employee morale and improving customer experience, the retailer said. Wal-Mart Chief Financial Officer Charles Holley said during a Tuesday media call that customer surveys reveal the changes are "already having a positive effect."

Investments in e-commerce also affected earnings by 2 cents per share. Wal-Mart saw worldwide online sales increase about 17 percent in the first quarter. Guidance issued by the company earlier this year calls for up to $1.5 billion in e-commerce investments.

Considering the heavy investments in e-commerce and employees, the down quarter shouldn't have been unexpected, said Bob Williams, senior vice president and managing director of Simmons First Investment Group Inc. in Little Rock.

"This was a no big surprise that it would put a squeeze on them," Williams said. "The margins have always been so tight. For them to take this step was predictable. There were definitely some bright spots in there. What I read into it, more importantly, is where management is going to focus. What I noticed was they are keying in on e-commerce. I think that is critical to the long-term viability of Wal-Mart."

Wal-Mart continues to look for growth opportunities with online shoppers as it attempts to blend its digital and physical assets in a fight against competitors, including Amazon.com. Wal-Mart confirmed it is testing a $50 subscription delivery service for select customers. The company continues to expand its grocery delivery and pickup services.

Core grocery business remains a focus of Wal-Mart U.S. CEO Greg Foran. Wal-Mart is looking to improve its standing among grocery shoppers who are forgoing supercenters for dollar stores and traditional grocers. Wal-Mart is seeing growth in its Neighborhood Market format. Same-store sales were up 7.9 percent compared with last year.

Sam's Club reported revenue of $13.5 billion with a 3.8 percent decrease in same-store sales. Excluding gas sales, the revenue at Sam's was up 0.04 percent. Raymond James analyst Budd Bugatch declined an interview request, but told CNBC earlier in the day that the quarter was "a disappointment" for Sam's Club, the wholesale warehouse division of Wal-Mart.

"The fact that revenues were still light means traffic is still light," Brian Gilmartin, portfolio manager at Trinity Asset Management Inc. in Chicago said. "It is clear now in hindsight that [Wal-Mart] seemed to get little benefit from the supposed 'tax cut' in the form of the drop in gasoline prices."

Bugatch said unlike most of Wall Street his firm never "got overly excited" about the idea that lower gas prices would lead to increased foot traffic and improved sales for Wal-Mart.

International sales increased 3.4 percent year over year as Wal-Mart experienced growth in four of its top five markets -- Mexico, Brazil, China and Canada. Competition and deflation in food limited growth in the United Kingdom, international CEO David Cheesewright said.

E-commerce sales were up 40 percent in China and the company plans to add 33 stores there this year. Wal-Mart is planning 29 supercenter building or expansion projects, plus the acquisition of 13 stores in Canada this year.

Growth in some international markets wasn't enough to overcome challenges created by currency exchange rates. Currency fluctuations resulted in what the company described as a "greater than anticipated impact" on first-quarter results. A strong U.S. dollar led to $3.3 billion in losses, about 3 cents in earnings per share.

Earnings also were limited by about $33 million in compliance-related costs. Wal-Mart spent $25 million on an ongoing investigation into whether it violated the Foreign Corrupt Practices Act and another $8 million for operation of and improvements to its global compliance program.

Compliance-related expenses were down from the $53 million spent by Wal-Mart during the first quarter of last year.

McMillon said the company remains focused on investing in e-commerce and employees with the goal of improving sales. Growing revenue while making those major investments continues to be a challenge for the retailer. Guidance for the second quarter was set between $1.06 and $1.18 with a 4-cent-per-share effect from investment in employees with a full-year effect of 20 cents.

"Our objective is to make changes to improve our short- to midterm performance while, at the same time, position the company for the long term," McMillon said in a prerecorded earnings call. "By position, I'm referring to how we set ourselves up to serve customers for years to come and the strategic choices we're making are in two critical areas: people and technology."

Business on 05/20/2015

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