Wal-Mart Stores Inc on Wednesday said that higher wages as well as spending on e-commerce and lower prices would cut earnings per share as much as 12 percent next fiscal year, sparking the steepest one-day decline in the company’s shares in 25 years.
Wal-Mart chief executive Doug McMillon said that a US$1.5 billion investment in wages and training, including raising the minimum store wage to US$10 an hour from US$9, were needed to improve customer service and would account for three-quarters of the expected 6 percent to 12 percent drop in earnings per share next year.
The world’s largest retailer by revenue also announced a US$20 billion share buyback, but the drop in its share price wiped out close to the same amount in market value and the 10 percent drop was the worst one-day percentage performance since January 1988.
“We can deliver stronger financial performance in the short-term simply by running our core business better, but that won’t be enough,” McMillon said at an investor meeting in New York.
The company forecast earnings per share would grow 5 to 10 percent in the fiscal year ending in January 2019.
Wal-Mart Stores said current fiscal full-year sales would be flat due to the stronger-than-anticipated impact of the US dollar. It had previously forecast net sales growth of 1 to 2 percent for the current fiscal year ending January.
“The guidance is very disappointing,” Edward Jones analyst Brian Yarbrough said. “What if these investments don’t lead to better sales? That’s the biggest question.”
Wal-Mart is spending US$1.5 billion in higher wages and training next year. Greg Foran, head of the US business, said Wal-Mart would add 3,500 managers in the US to improve its curbside grocery pickup service.
Wal-Mart also said it was adding curbside pickup for groceries ordered online to 10 new markets, including Dallas, Miami and Tulsa, bringing the total to 23. It is to add another 20 markets early next year, expanding a service it believes capitalizes on its network of stores — something Amazon.com Inc does not have — and is likely to be a key driver of growth.
The company is building out a network of warehouses to handle e-commerce, a costly move Wal-Mart sees as essential to stopping Amazon and other rivals from stealing its best customers.
At the same time Wal-Mart projected slower growth in new stores, with 85 to 95 of the smaller Neighborhood Markets format planned for the fiscal year ending in January 2017, down from 160 to 170 planned for the current fiscal year.
Supercenter openings would slow to 50 to 60 in fiscal 2017 from 60 to70 this year.
Price competition was one reason for the slower growth. Foran said that Wal-Mart could not compete with local grocers in some markets, a factor that has played into its scaled back expansion plans for smaller stores.
“To be completely candid, when we are up against someone who is really good at supermarkets, frankly our fresh offering has not been on par with what it takes to win in those environments,” Foran said.
Wal-Mart has been grappling with sluggish sales, leading investors to seek significant changes. Last week, the company announced a new chief financial officer and appointed a chief merchant.
Shares closed down 10 percent at US$60.03 on Wednesday.
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