Wal-Mart cuts profit outlook, citing rising wages and online investment

Wal-Mart cut its annual profit forecast Tuesday, attributing the move to the effects of a stronger dollar and increased spending on workers’ wages and e-commerce.

The retail giant said it was feeling the financial fallout of agreeing to raise employees’ wages to at least $9 an hour and of its investment to increase its online services as it vies to compete with e-commerce titans like Amazon.

Still, Wal-Mart executives said that spending was necessary to win back customers with an improved shopping experience at its brick-and-mortar stores and a more competitive presence on the Internet.

“We’re pleased that the investments we’ve made are helping to improve our business. Even if it’s not as fast as we would like, the fundamentals of serving our customers are consistently improving,” Doug McMillon, president and chief executive of Wal-Mart Stores, said in a statement.

“In this case, our desired changes require investments, which are pressuring earnings this year. We’re confident that our strategic plan will create robust sustainable growth for shareholder returns over time.”

The latest numbers underscore the struggles faced by Wal-Mart, once an unstoppable retail behemoth, as it tries to put a period of a prolonged decline in sales behind it.

Wal-Mart’s decision to raise wages for its lowest-paid hourly store employees came after a swell in nationwide campaigning by labor activists and others who highlighted the plight of low-wage workers in the fast-food and retail industries.

A tightening job market brought on by the recovering economy also prompted Wal-Mart to raise wages to attract more new workers and reduce turnover.

But the lackluster results test Wal-Mart’s commitment to improving the lot of its 1.3-million-strong workforce and to revamping customer service at its 5,000 stores across the country, as well as online.

For the second quarter, Wal-Mart reported earnings of $1.08 a share, below analysts’ expectations of $1.12 a share. That came despite a quarterly revenue of $120.2 billion, which was $500 million higher than forecast.

Comparable sales at stores in the United States, or sales open at least a year, rose a healthy 1.5 percent, the fourth consecutive quarter of increases in the commonly used retail metric.

Wal-Mart lowered its full-year guidance to a range of $4.40 to $4.70 a share from a previous range of $4.70 to $5.05.

Despite these short-term woes, Wal-Mart’s investments will eventually pay off, Charlie O’Shea, a vice president at Moody’s, said in a note.

Wal-Mart’s performance in the second quarter “reflects the negative impact on near-term earnings of long-term investments in e-commerce and in its employees that we believe will ultimately bear fruit,” O’Shea said.

“Investing in the development of an online channel, which is in effect building a second business, is not cheap and results do not happen overnight,” he said. Even Amazon’s experience has shown that “short-term earnings can get a bit choppy.”

Still, Wal-Mart’s spending on wages, training and additional work hours at its stores have amounted to more than the retailer initially forecast, shaving 24 cents off its projected per-share earnings for the year, 4 cents more than expected.

The extra hours, in areas like product stocking, “were significant, and more than we had planned,” McMillon said in prepared remarks to investors.

Wal-Mart said the strong dollar continued to weigh on its earnings. Problems on the international side of Wal-Mart’s business went beyond the strong U.S. currency, however.

Operating income from its international business fell even with currency swings factored in, hurt by poor performance in countries like Britain, where heightened competition in groceries drove down sales 4.7 percent.

Mexico and Canada were among the only countries where Wal-Mart logged strong sales gains.

Wal-Mart stock closed Tuesday at $69.48, down $2.43.

This story was originally published August 18, 2015 at 4:58 PM with the headline "Wal-Mart cuts profit outlook, citing rising wages and online investment."