Wal-Mart cuts profit outlook as sales stay sluggish, costs mount

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BENTONVILLE, Ark. – Wal-Mart Stores Inc. cut its annual profit outlook on Thursday amid sluggish sales, higher-than-expected health care costs and the need to invest more in its e-commerce operations.

The world’s largest retailer eked out a 0.6 per cent increase in second-quarter profit, dragged down by a weak U.S. business. A key revenue measure was flat in its U.S. discount stores, though it reversed five straight quarters of declines. Meanwhile, the number of customers has now fallen seven quarters in a row.

The results show the continued challenges facing Wal-Mart’s new management team. Doug McMillon, who was head of the company’s international division, took over the company as CEO on Feb. 1.

Last month, he named Greg Foran, who was the CEO of Wal-Mart’s China business as the head of Wal-Mart’s U.S. discount business, which accounts for 60 per cent of the company’s revenue. Foran, who started his new job earlier this month, replaced Bill Simon, who had held the position since 2010.

The Bentonville, Arkansas-based company is facing challenges from a slowly recovering economy and fierce competition from the likes of online king Amazon.com, dollar stores and grocers. It’s also dealing with a shift among shoppers seeking the convenience of small stores or buying on their mobile devices and PCs.

Wal-Mart’s low-income shoppers, who on average make $45,000 a year, were squeezed by the recession that began at the end of 2007 and have struggled to recover since it ended in 2009. While the job and housing markets are rebounding, Wal-Mart’s low-income shoppers have not benefited and continue to struggle to stretch their money between paychecks.

Wal-Mart also said Thursday that the Nov. 1, 2013, expiration of a temporary boost in food stamps is still hurting its shoppers’ ability to spend.

Analysts believe that competition could get even more intense heading into the final months of the year. Amazon.com is beefing up its services, like recently expanding its same-day delivery. A bigger Dollar Tree also could put more pressure on Wal-Mart. The dollar-store chain announced last month that it’s buying rival Family Dollar for $8.5 billion, significantly broadening its reach.

In February, Wal-Mart announced that it will more than double its expansion plans for its Neighborhood Markets and Wal-Mart Express smaller stores that cater to shoppers looking for more convenience with fresh produce, meat and household and beauty products.

In fact, revenue at its Neighborhood Markets rose 5.6 per cent during the second quarter, and customer traffic rose 4.1 per cent.

Wal-Mart has also vowed it will be move more quickly to bring e-commerce together with physical stores to better serve shoppers. That means rebuilding its e-commerce operation to further personalize the online shopping experience of each customer and making other enhancements.

Wal-Mart reported its global e-commerce sales rose 24 per cent on a constant currency basis during the second quarter, with double-digit growth in the U.S., United Kingdom, China and Brazil. However, that’s below its annual e-commerce sales forecast of 30 per cent, and the company said it’s cutting its full-year estimate to 25 per cent.

Wal-Mart has also been sharpening its focus on everyday low prices and bringing that strategy abroad.

The challenges played out in the company’s financial results.

The company reported net income of $4.09 billion, or $1.26 per share, compared with $4.07 billion, or $1.24 per share, in the same quarter a year ago.

Earnings, adjusted to account for discontinued operations, were $1.21 per share. The average estimate of analysts surveyed by Zacks Investment Research was for earnings of $1.21 per share.

The company said revenue rose roughly 3 per cent to $119.34 billion from $116.1 billion in the same quarter a year earlier. Analysts expected $119.06 billion, according to Zacks.

In the U.S., revenue at stores open at least a year was unchanged from a year ago, including flat sales at Sam’s Clubs.

Sam’s Club, which is facing fierce competition from rival Costco, has been trying to rev up its business with trendier home and fashion assortments and offering more incentives in its membership program.

“Stronger sales in the U.S. businesses would’ve helped our profit performance in the quarter,” said McMillon in a transcript of a prerecorded call Thursday. “We can get better operationally … and we will.”

Net sales increased 2.7 per cent at the Wal-Mart U.S. discount business, while rising 3.1 per cent in its international business and 2.3 per cent at Sam’s Clubs.

Wal-Mart said it now expects earnings per share for the year to be in the range of $4.90 to $5.15 per share. That’s down from its previous guidance of $5.10 to $5.45 per share.

Wal-Mart said that the reduction in full-year profit projections assumes a continued challenging global economy. But Wal-Mart also said that far more U.S. employees and their families are enrolling in its health care plan than it expected.

As a result, it now expects the impact to be about $500 million for the fiscal year, which is about $170 million higher than the original estimate of about $330 million provided in February.

Wal-Mart is also investing more in its online business, including hiring people and building shipping centres.

Shares closed up 36 cents at $74.39 on Thursday.

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