Wal-Mart Cuts Annual Sales Forecast as Supercenters Struggle

Wal-Mart Stores Inc. cut its sales forecast yesterday and acknowledged the need to do a better job stocking shelves and staffing stores to win back customers in a tough economy.

The Bentonville, Arkansas-based company is now predicting sales growth of 2 percent to 3 percent this year, down from a previous forecast of as much as 5 percent. Wal-Mart also expects slower profit increases over the next three years as the company revamps its business and invests in e-commerce.

Chief Executive Officer Doug McMillon, who took the helm in February, is coping with a broad-based slump in retail spending and a slowdown in foot traffic at supercenters. Wal-Mart’s same-store sales -- an industry benchmark of health -- haven’t risen in six quarters. To cope, the company is adding less square footage than originally planned next year, focusing instead on smaller neighborhood stores and its Internet site.

“If you study retail history, you know that retailers come and go,” McMillon said at a meeting with analysts. Even if smaller stores eat into sales of supercenters, Wal-Mart has to “embrace change and be willing to cannibalize ourself if we need to be, so that we can set the stage for the future.”

Yesterday’s bleaker outlook sent Wal-Mart’s shares down 3.6 percent to $75.20 in New York, marking the biggest one-day decline in almost two years. Today, the shares declined 1.8 percent to $73.82 at the close in New York. They have dropped 6.2 percent this year.

Stocking Concerns

McMillon, 47, said yesterday that he sees plenty of room for improvement when touring Wal-Mart stores on surprise visits. He said stores need to boost in-stock levels -- a measure of the merchandise available on shelves for customers to buy. They also should address long checkout lines and improve staffing by increasing the number of worker hours. The company also pledged to enhance its fresh produce department and the way it prices products.

The upgrades may include a boost in pay, McMillon said. Currently there are fewer than 6,000 workers in the U.S. who make minimum wage, he said, and “it’s our intention to be in a situation where we don’t pay minimum wage at all.”

In March, Wal-Mart executives said at a company meeting that store shelves need to be better stocked and that resolving the matter could be a $3 billion opportunity. Bloomberg News had reported the year before that many items were not being replenished, leaving some shelves bare. Hundreds of e-mails poured in from once-loyal customers complaining they could no longer find what they were looking for and so were shopping elsewhere.

‘No Excuse’

There’s “no excuse” for the company not to be doing better in the U.S., McMillon told analysts at yesterday’s event. Opening new Neighborhood Market stores is part of its plan to win back customers. Wal-Mart will open as many as 200 of the outlets next year, compared with 60 to 70 supercenters. The company will add between 26 million and 30 million retail square feet worldwide this year, less than the 32 million to 34 million it had originally projected.

That reflects the declining importance of big-box stores in Wal-Mart’s fleet.

“We know that our supercenters are an important format for the stock-up trip, but we want to be thoughtful about our investment, ensuring that we align the space to evolving customer needs,” said Greg Foran, CEO of the company’s U.S. division. Neighborhood stores “provide our customers with convenient access to grocery, pharmacy services and other quick-trip needs.”

Changing Times

The move is “a recognition that business as usual is over,” David Strasser, an analyst at Janney Montgomery Scott LLC in New York, said in a report yesterday. “Supercenters have essentially run their course.”

The company is confronting a sluggish retail economy as it heads into the holiday shopping season. Retail sales in the U.S. dropped more than forecast in September, according to Commerce Department figures released yesterday. The 0.3 percent decrease followed a 0.6 percent gain in August.

Wal-Mart will invest $1.2 billion to $1.5 billion on e-commerce and digital projects next year, up from about $1 billion in the current fiscal year.

The company is preparing for a surge in e-commerce growth as more of its customers shop online, Chief Financial Officer Charles Holley said. Internet sales will amount to about $12.5 billion worldwide this year and rise roughly 25 percent the following year. After that, growth should average 30 percent to 40 percent through fiscal 2018.

The plan to open 200 small-format stores is less ambitious than what Janney’s Strasser had expected. The analyst, who maintains a buy rating on the stock, was forecasting 500 stores. Wal-Mart needs to focus more on the smaller locations since its current plans aren’t going to make a big enough difference, he said.

“That rollout is virtually nil,” Strasser said.

(A previous version of this story inadvertently included “less than” before the phrase minimum wage in the seventh paragraph.)

Before it's here, it's on the Bloomberg Terminal.