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Wal-Mart shares plunge after it predicts big earnings decline

October 14, 2015

Wal-Mart Stores Inc. suffered its worst stock decline in more than 15 years Wednesday morning after predicting a drop in annual profit, underscoring the giant retailer’s struggles to reignite growth.

Earnings will decrease 6 percent to 12 percent in fiscal 2017, which ends in January of that year, the Bentonville, Arkansas-based company said at its investor day on Wednesday. Analysts had estimated a gain of 4 percent on average, according to data compiled by Bloomberg.

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

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.

Wal-Mart employs about 38,350 associates in Indiana, which includes 94 supercenters, 10 distribution centers, eight discount stores, 8 neighborhood markets and 16 Sam’s Club locations, according to the firm’s website.

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, Chief Executive Officer Doug McMillon said at the event.

Wal-Mart shares fell as much as 9.9 percent Wednesday, to $60.12 each, their biggest drop since February 2000. The stock was already down 22 percent this year before the decline.

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. 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.

"This is a growth company—it just happens to be a really large growth company," McMillon said.

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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