Wal-Mart Trims Forecast as Economy Restrains Shoppers

Wal-Mart Stores Inc., the world’s largest retailer, cut its annual profit forecast for the second time since August as the discount chain struggles to prevent economically challenged customers from taking their business to dollar stores and other rivals.

While the company’s low-income customers are among the hardest hit amid persistent unemployment and higher taxes, some of its troubles are self-inflicted. The discount chain has alienated some U.S. shoppers because it doesn’t have enough workers to keep shelves adequately stocked, leading some consumers to decamp to smaller-format stores that offer merchandise starting at $1. Sales at Wal-Mart U.S. stores open at least 12 months excluding fuel fell 0.3 percent in the quarter ended Oct. 25. Analysts predicted they’d be little changed.

“In retail, it comes down to same-store sales, and today was another disappointment,” Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis, said today in an interview. “On the fringe, they’ve got to be losing customers.”

He recommends buying the shares.

Profit per share in the year ending January 2014 will be $5.11 to $5.21, excluding items such as store closings in Brazil and China, Bentonville, Arkansas-based Wal-Mart said today in a statement. The midpoint of the range trails analysts’ average estimate of $5.19. The company forecast $5.10 to $5.30 three months ago and profit as high as $5.40 in February.

Sales Slide

Wal-Mart’s U.S. same-store sales have slid for three straight quarters as a 2 percentage point increase in Social Security taxes reduced spending among its shoppers, many of whom live paycheck to paycheck. The 16-day federal government shutdown that ended Oct. 17 also has damped consumer confidence. The Thomson Reuters/University of Michigan index of consumer sentiment dropped to the lowest level in almost two years this month.

Wal-Mart, which has a corporate goal of keeping inventory growth at or less than the rate of net sales growth, scaled back its orders from suppliers for the third and fourth quarters to keep inventory from rising too quickly, according to a September e-mail from an ordering manager at the company’s headquarters that was obtained by Bloomberg News.

In response to the report in September, the retailer said it felt good about its inventory position and was managing it appropriately. The order pullback wasn’t across the board and was happening “category by category,” David Tovar, a spokesman, said at the time.

Inventory Gain

U.S. inventory increased 5.1 percent, Bill Simon, the company’s U.S. CEO, said today on a conference call. While that was slower than the 6.9 percent inventory gain in the previous quarter, it was faster than third-quarter U.S. net sales growth of 2.4 percent.

Another challenge for Wal-Mart has been keeping its shelves adequately stocked with a smaller workforce. As of September, the U.S. workforce at Wal-Mart’s namesake and Sam’s Club warehouse chains fell by about 120,000 employees in the past five years, to about 1.3 million, according to regulatory filings. In that time, the company had added about 500 U.S. stores.

Wal-Mart in September said it was hiring 55,000 seasonal workers and adding an additional permanent 70,000 part-time and full-time workers to help gear up for the holiday season.

“We’re also more strategic in scheduling associate hours, allocating additional hours to peak times to ensure we’re well-stocked and ready for the customer,” Simon said today. “This has an additional benefit of associates consistently getting more hours versus last year.”

Wal-Mart shares rose 0.1 percent to $78.97 at 12:49 p.m. in New York. The stock had gained 16 percent this year through yesterday, compared with a 25 percent increase for the Standard & Poor’s 500 Index.

Third Quarter

Net income in the third quarter rose 2.8 percent to $3.74 billion, or $1.14 a share, from $3.64 billion, or $1.08, a year earlier, the company said. The average of 26 analysts’ estimates compiled by Bloomberg was $1.13. Revenue increased 1.7 percent to $115.7 billion, trailing the $116.8 billion average projection.

Sales at Menomonee Falls, Wisconsin-based Kohl’s Corp. also trailed analysts’ estimates, falling 1 percent to $4.44 billion, compared with the $4.55 billion average projection. The shares slid 7.3 percent to $53.99.

Sales in Wal-Mart’s international division increased 0.2 percent to $33.1 billion. Excluding the effect of foreign-currency fluctuations, sales would have risen 4.1 percent to $34.4 billion.

China Strategy

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. Wal-Mart said last month that it plans to add as many as 110 stores over three years in China, while shutting some outlets and remodeling dozens more. The retailer also named two new managers, in business development and real estate, to its China team last month.

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 were $69 million in the quarter, less than its guidance of $75 million to $80 million. Those expenses will be about $75 million to $80 million in the fourth quarter.

Third-quarter sales in Wal-Mart’s Sam’s Club warehouse division rose 1.1 percent to $14.1 billion.

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