Wal-Mart Stores Inc., the world’s largest retailer, cut its annual profit forecast after shoppers’ reluctance to buy more than the bare necessities hurt second-quarter sales.
Profit per share in the year ending January 2014 will be $5.10 to $5.30, the Bentonville, Arkansas-based company said today in a statement. That’s less than its earlier projection of $5.20 to $5.40. The average of 28 analysts’ estimates compiled by Bloomberg was $5.29 a share.
Chief Executive Officer Mike Duke has been advertising Wal-Mart’s low prices and improving its grocery offerings to draw U.S. shoppers coping with elevated unemployment, higher taxes and rising gas costs. Sales at Wal-Mart U.S. stores open at least 12 months excluding fuel fell 0.3 percent in the quarter ended July 26. Analysts estimated a 0.9 percent gain.
“The low-income consumer is struggling -- that’s dragging them down,” Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis, said today in an interview. He recommends buying the shares. “It’s a very tough environment out there.”
Wal-Mart fell 2.6 percent to $74.41 at the close in New York, the biggest one-day drop since Dec. 12. The shares have gained 9.1 percent this year, compared with a 16 percent increase for the Standard & Poor’s 500 Index.
Second-quarter net income rose 1.3 percent to $4.07 billion, or $1.24 a share, from $4.02 billion, or $1.18, a year earlier, the company said. The most recent quarter’s results included a charge of 1 cent a share for a tax matter. The average of 27 analysts’ estimates compiled by Bloomberg was $1.25.
Revenue rose 2.3 percent to $116.9 billion, trailing analysts’ $118.5 billion average estimate. That marks the fifth straight quarter that the company’s sales have missed analysts’ projections.
Wal-Mart’s sales have been hampered this year by a 2 percentage point increase in Social Security taxes that has reduced spending among its shoppers, many of whom live paycheck to paycheck. For a person making $40,000 a year, the extra tax bite is about $15 a week.
Jerry Murray, a former vice president of finance and logistics at the retailer, said in a February e-mail obtained by Bloomberg News that the sales that month had been a “total disaster.”
“The 2 percent payroll tax increase continues to impact our customer,” Bill Simon, Wal-Mart’s U.S. president and CEO, said in today’s statement. The company expected sales to be helped by rising grocery prices, which didn’t occur in a “meaningful way,” he said.
Higher gas prices are sapping more of shoppers’ buying power as well. The average U.S. price for a gallon of unleaded gasoline in both June and July was higher than a year earlier and about the same in May, according to AAA.
Those factors are combining to reduce the amount consumers are willing to spending on discretionary items, such as toys and electronics. Same-store sales in the entertainment category fell by a mid single-digit percentage rate in the quarter, Simon said today on a conference call.
Third-quarter earnings per share will be $1.11 to $1.16, Wal-Mart said. Analysts projected $1.17.
To try to keep shoppers coming into stores, Wal-Mart has introduced a major advertising push promoting its low prices. The company has been reminding customers that it offers full refunds on fruits and vegetables and sending auditors on weekly store checks to monitor its groceries’ quality.
The retailer also is focusing as never before on selling more beer, wine and liquor and has set a target of doubling alcohol sales by 2016, according to adult beverage distributors that attended a meeting with Wal-Mart executives in September.
Same-store sales of adult beverages rose at a high single-digit percentage rate in the quarter, Simon said.
Second-quarter sales in Wal-Mart’s international division increased 2.9 percent to about $33 billion. Excluding the effect of $680 million in foreign-currency fluctuations, sales would have risen 4.4 percent to $33.4 billion.
The company cited “significant ongoing headwinds” from expected currency exchange rate fluctuations as part of the rationale for cutting its annual sales forecast. The retailer now expects sales will rise as much as 3 percent, down from a maximum of 6 percent previously.
The company has been working to reintroduce its everyday low price strategy in Brazil and China after struggling to find strong sales growth in both markets.
The U.S. Department of Justice and the U.S. Securities and Exchange Commission are investigating allegations that Wal-Mart systematically bribed Mexican officials so it could more quickly open stores in the country. Federal and local government agencies in Mexico also are involved in investigations. Wal-Mart said in a November filing that it also has started inquiries into potential violations of the FCPA at operations in Brazil, India and China.
The company said today that expenses related to probes of those possible violations of the Foreign Corrupt Practices Act will be $75 million to $80 million in the third and fourth quarters. Compliance and FCPA costs have been $155 million year-to-date, the company said.