Feb. 1 (Bloomberg) -- Doug McMillon’s first day as chief executive officer of Wal-Mart Stores Inc., the world’s largest retailer, promises to be a busy one.
The 47-year-old head of the company’s international division, who replaces Mike Duke today, will have to help the U.S. unit cope with government benefit cuts for the poor that are turning out to hurt sales, not help them as the company’s executives had expected. He’ll also need to grapple with higher-than-projected costs in Brazil, the continuing threat from online retailers and a lackluster retail environment.
Some of those obstacles will drag fourth-quarter profit to the low end or even under its forecast for the period, Wal-Mart said in a statement yesterday. They also threaten to harm the company in the future if not addressed, said Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis.
“It’s difficult out there for that low-end consumer, and that is such a big part of Wal-Mart’s business,” Yarbrough said in an interview. “Maybe they could make some merchandising changes. Maybe they could get more aggressive on prices. That low-income customer continues to be crunched.”
Same-store sales at U.S. stores and the Sam’s Club warehouse division will be less than projected, the Bentonville, Arkansas-based company said in a statement. Wal-Mart said in November that profit per share in the quarter ended yesterday would be $1.60 to $1.70. Analysts estimated $1.65, on average.
Wal-Mart, the world’s largest retailer, fell 0.1 percent to $74.68 in New York yesterday. The stock rose 15 percent last year, trailing the 30 percent gain for the Standard & Poor’s 500 Index.
Wal-Mart’s announcement follows forecast cuts at several U.S. retailers because of a holiday season marked by profit-eating discounts to lure traffic. Unlike department stores and electronics chains, Wal-Mart is taking a hit after U.S. lawmakers allowed a temporary increase in food-stamp benefits that was passed as part of the 2009 economic stimulus package to expire Nov. 1.
Wal-Mart U.S. CEO Bill Simon said in October that the reduction may actually help the retailer.
“Price will become more important,” Simon said at a meeting with analysts. “And when price is more important, we’re more relevant.”
Yesterday Wal-Mart said the loss of benefits hurt sales more than expected.
The retailer’s international business faces challenges as well.
The company, which closed 50 stores in Brazil and China, said non-income tax items in the South American nation will reduce profit in the quarter by 6 cents a share and that employment claims there will cut profit by 5 cents. Wal-Mart has been struggling to grow in Brazil as it works to reintroduce its everyday low price strategy there. A change in the way Wal-Mart accounts for leases in China will reduce profit by 3 cents a share.
“The international business has not been performing where they hoped or where investors hoped,” Scott Mushkin, an analyst at Wolfe Research Securities in New York, said in a telephone interview.
He has the equivalent of a hold rating on the shares.
A week ago, Wal-Mart said it would eliminate 2,500 employees such as assistant managers and phone attendants at Sam’s Club in order to streamline management. That program will trim 1 cent a share from fourth-quarter profit.
The company plans to report full fourth-quarter results on Feb. 20.
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