Wal-Mart CEO Defends Plan After Outlook Sends Stock Tumbling

Wal-Mart CEO: Next Year Is Pressure Point
  • Earnings will fall as much as 12 percent in next fiscal year
  • Retail chain investing in its workforce, e-commerce programs

Wal-Mart Stores Inc. Chief Executive Officer Doug McMillon defended his attempt to revamp the retailer after a weak profit forecast sent the shares on their biggest decline in more than 27 years.

The CEO said in an interview that he’s focused on the long-term health of the company, even as his efforts to increase worker pay and improve e-commerce capabilities cause “a pressure point.”

"What we’re talking about is how we transform the company,” he told Bloomberg Television’s Stephanie Ruhle and David Westin. “We have got to get the company positioned to serve the customer in the long term.”

Wal-Mart said on Wednesday that earnings will decrease by 6 percent to 12 percent in the fiscal year ending January 2017. The prediction jolted analysts, who had estimated a gain of 4 percent on average, according to data compiled by Bloomberg. The dour outlook follows a protracted sales slump at Wal-Mart’s U.S. stores and mounting concern that the chain is losing ground to online competition such as Amazon.com Inc.

The forecast was “far worse than anyone expected,” Charles Grom, an analyst with Sterne Agee & Leach, said in a note to clients.

Wal-Mart shares fell 10 percent to $60.03 at the close in New York, the biggest one-day drop since January 1988. Even before the plunge, the stock was down 22 percent this year.

Wal-Mart has been pumping money into its workforce and e-commerce capabilities in a bid to reignite stagnant sales growth -- investments that will continue in fiscal 2017. The company raised its base employee wages to $9 an hour in April and plans to boost hourly pay to at least $10 next year. The effort, combined with an expanded training program, added about $1 billion in costs this year and $1.5 billion next year.

The retail chain also said its board has authorized $20 billion in stock buybacks over a two-year period. That’s on top of a $15 billion repurchase program begun in 2013, but the move did little to placate investors. In addition, Wal-Mart is actively reviewing its portfolio for ways to streamline the business, McMillon said at the company’s investor day on Wednesday.

The buybacks could be a sign of further trouble, Grom said. The move “implies significant margin contraction along with modest sales growth," he said.

Fixing Stores

Wal-Mart, the world’s largest retailer, is trying to win back customers by improving the shopping experience, expanding its online grocery pickup service, and opening more small-format stores, called Neighborhood Markets. It has also been spending $1 billion to improve its website and opening new distribution centers, aiming to speed the delivery of online orders.

“We’re building a technology company into Wal-Mart,” McMillon said.

Investors, though, have been skeptical that the changes will reignite growth.

The company previously cut its profit forecast for this year. Wal-Mart said in August it expects earnings of $4.40 to $4.70 a share, down from an earlier projection of as much as $5.05 a share.

Wal-Mart said on Wednesday that net sales will grow 3 percent to 4 percent annually over the next three years, though they’ll be “relatively flat” in the current year.

Wal-Mart also posted second-quarter earnings that missed analysts’ estimates. Profit amounted to $1.08 a share in the period, excluding some items, the company said in August. Analysts had expected profit of $1.12 a share, according to data compiled by Bloomberg. It’s due to report its next quarterly results on Nov. 17.

"There is no way they can continue to grow, they are just too big," Ivan Feinseth, chief investment officer at Tigress Financial Partners, said before Wednesday’s forecast. "They do $500 billion worth of revenue -- how are you going to grow that?"

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