Wal-Mart Stores cut its profit outlook due to increased spending on employee wages and e-commerce on Wednesday, sending shares in the world’s largest retailer plunging.
Wal-Mart predicted earnings per share would fall between six and 12 percent in fiscal 2017 that begins on February 1, its “heaviest” year in terms of investment.
Wal-Mart plans $1.5 billion in extra spending in 2017, with about 75 percent of that sum going to higher wages, company executives said.
The company also trimmed its current fiscal 2016 sales outlook to “relatively flat” from a prior projection for a gain of 1-2 percent, citing the strong dollar.
Wall Street’s reaction was swift and brutal, with Wal-Mart shares diving more than nine percent, pushing the Dow into the red.
Investors also punished other retail stocks, including Target (-3.9 percent), Costco Wholesale (-1.7 percent), Best Buy (-5.1 percent)and TJ Maxx parent TJX (-1.3 percent).
The lower profit forecast overshadowed an announcement that Walmart plans $20 billion in share repurchases.
“There is a big share buyback here, but it just is not enough to offset guidance that is this horrible,” said Jon Ogg of 24/7 Wall Street.
“The news is so much less than what was expected that it created a spillover into retail stocks and was a big drag on the Dow Jones Industrial Average.”
Wal-Mart executives depicted the hit on profits as a period of short-term pain that would lead to long-term prosperity. Chief financial officer Charles Holley said earnings by fiscal year 2019 would rise 5-10 percent compared with the prior year.
Wal-Mart unveiled a plan in February to lift entry wages to at least $9 an hour in 2015 and at least $10 an hour in 2016. Wal-Mart is also raising the salaries for many senior and mid-level employees and reforming its employee structure to encourage staff development and advancement.
Wal-Mart chairman and chief executive Doug McMillon described the wage increase as “a big investment in people” and “of strategic signficance” because of the payout it will yield in a more motivated workforce and an improved customer experience.
– Big online push –
Wal-Mart is also raising its investment in e-commerce from $700 million in 2015 to $900 million in 2016 and a projected $1.1 billion in 2017.
The funds go to construct new goods distribution centers around the US and to build up programs at retail stores to deliver goods directly to customers or to organize items for customer pickup. Wal-Mart has also added staff specializing in data analytics and mathematics.
Wal-Mart’s mobile app boasts 24 million monthly active users, the company said. Executives said they aim to “deepen” their relationships with customers in ways that anticipate needs.
Wal-Mart expects to increase its sale of fresh goods and produce and to expand somewhat its clientele beyond low- and middle-income consumers to become “a little more relevent to consumers on the upper end of the income scale,” McMillon said.
The company is touting the marrying of retail assets with a more robust online presence as a counterpoint to online giant Amazon and other rivals.
“We have strengths and assets to build on and are making progress to position the company for the future,” McMillon said.
“Our investments in our people, our stores and our digital capabilities and e-commerce business are the right ones. We will be the first to build a seamless customer experience at scale to save our customers not only money but also time.”
Near 1830 GMT, the Dow member’s shares were off 9.7 percent at $60.23.