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Wal-Mart Cuts Profit Forecast Amid Slow Sales, Health Costs

Wal-Mart Stores Inc. Chief Executive Officer Doug McMillon
Wal-Mart Stores Inc. Chief Executive Officer Doug McMillon, who took the post in February, has been working to keep prices low and expanding the retailer’s smaller stores to increase revenue. Photographer: Drew Angerer/Bloomberg

Wal-Mart Stores Inc., the world’s largest retailer, reported stagnant same-store sales and cut its earnings forecast for the year, hurt by higher health-care costs and slow traffic at its supercenters.

Earnings for the year will now be $4.90 to $5.15 a share, down from a previous range of as much as $5.45, the Bentonville, Arkansas-based company said today in a statement. Sales at U.S. Wal-Mart and Sam’s Club stores open at least 12 months were little changed last quarter, which ended Aug. 1.

Chief Executive Officer Doug McMillon, who took the post in February, is trying to revive U.S. growth in the face of a slow economic recovery. The retailer hasn’t posted a same-store sales gain for six quarters, and customers are making fewer trips to big-box retailers. Cuts in government assistance also are leaving low-income shoppers with less money to spend.

“They continue to struggle driving traffic to stores,” said Brian Yarbrough, an analyst at Edward Jones in St. Louis. “It’s difficult out there. At some point, we’ve got to see better same-store sales.”

Wal-Mart’s stock has dropped 5.5 percent this year, trailing the 5.8 percent gain for the Standard & Poor’s 500 Index. The shares rose less than 1 percent to $74.39 today in New York.

Health Expenses

In cutting its forecast, Wal-Mart cited higher U.S. health-care costs and increased spending in e-commerce, where it aims to challenge Inc.’s dominance. The company sees health-care expenses growing by more than $500 million. Wal-Mart and its subsidiaries employ about 2.2 million people worldwide, and the company has more than 11,000 stores.

“E-commerce is key,” Yarbrough said. “It’s the right place to be investing in.”

To improve customer service, Wal-Mart increased staffing of its stores’ front ends, delis, bakeries and overnight stocking, as well as entertainment and sporting goods. Salaries and wages rose more than $200 million from a year earlier, the company said.

Wal-Mart and federal authorities also are investigating possible violations of the Foreign Corrupt Practices Act in the company’s operations in Mexico, Brazil, China and India. FCPA and compliance-related costs were about $43 million last quarter, with $31 million going to ongoing investigations and $12 million going toward an effort to improve its global compliance program.

Food Stamps

A reduction in food-stamp payments is harming Wal-Mart’s U.S. sales, said Patrick McKeever, an analyst from MKM Partners in New York.

“About 20 percent of Wal-Mart’s customers are on government assistance,” he said.

Second-quarter income from continuing operations fell 3.4 percent to $3.92 billion, or $1.21 a share, from $4.06 billion, or $1.23, a year earlier. That matched the average analyst estimate compiled by Bloomberg. Sales rose 2.8 percent to $120.1 billion in the period, helped by e-commerce orders and the opening of new smaller-format stores.

Wal-Mart said in February it was increasing its capital spending by an additional $600 million this year to add more Neighborhood Market and Express stores. Those smaller-format outlets have outperformed its supercenters and Sam’s Club locations. Wal-Mart executives said today on a call that the company plans to open about 90 Express stores this fiscal year.

Sales at Neighborhood Market stores increased 5.6 percent last quarter, outpacing the growth of traditional stores and e-commerce.

Total revenue at Wal-Mart’s U.S. stores rose 2.7 percent to $70.6 billion, while international sales climbed 3.1 percent to $33.9 billion. Sam’s Club’s net sales gained 2.3 percent to $14.9 billion.

“We wanted to see stronger comps in Wal-Mart U.S. and Sam’s Club,” McMillon said in the statement. “Stronger sales in the U.S. businesses would’ve also helped our profit performance.”

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