4 problems hobbling a Walmart turnaround
Walmart (WMT) may be the world's largest retailer and America's biggest private employer, but to many on Wall Street it's a paper tiger. And for evidence, they point to its latest disappointing earnings report.
Net income at the Bentonville, Arkansas-based company plunged 17 percent to $3.63 billion , or $1.08 per share, in the last quarter from $3.48 billion, or $1.26 per share, a year earlier. Revenue was little changed at $120.2 billion. Wall Street had expected per-share earnings of $1.12 on revenue of $120 billion. But at least U.S. same-store sales, a key metric measuring activity at stores opened at least a year, rose 1.5 percent, that measure's fourth straight increase.
Walmart is facing unprecedented challenges under CEO Douglas McMillon, who began his career at the retailer unloading trucks as a teenager. McMillon earned headlines earlier this year when he announced wage increases for hourly employees. Wall Street, though, is concerned about how the company is ratcheting up spending to make itself more competitive.
"Winning in the future requires change," said McMillon in today's earnings conference call, adding that the company realizes that "our bottom line results should have been better." He added that "Change, in this case, requires investment, and investment pressures short-term earnings."
Walmart's shares tumbled 3.4 percent, or $2.43, closing at $69.48 today as Wall Street took McMillon at his word. To make matters worse, the company also slashed its earnings outlook for the year to $4.40 to $4.70 per share, down from an earlier forecast of $4.70 to $5.05.
While Walmart management is focused on change, a turnaround won't be easy. Here are four problems that need solving:
Grocery games. In the early part of the decade, the financial press was chock full of talk about how Walmart was going to crush the incumbent grocery chains. It indeed proved to be a formidable competitor and now gets about 55 percent of revenue from grocery. What many people don't realize is that the grocery chains fought back and slashed their prices.
As Brian Yarbrough, an analyst with Edward Jones, noted, their strategy worked. "Now, what you're seeing is that consumers aren't willing to deal with the inconvenience and the sheer size of a Walmart supercenter when they could only save 5 or 6 percent," told CBS MoneyWatch. Yarbrough rates Walmart shares as a "hold."
Underinvestment. Over the past few years, Walmart has squeezed every possible nickel of profit from its stores. Most analysts believe it took this too far. Stores wound up not having enough workers to keep the shelves stocked and cash registers staffed.
Not surprisingly, Walmart ranks dead last in customer satisfaction among its peers in the closely followed American Customer Satisfaction Index. The company has said improving customer service is a priority, and it announced plans Tuesday to add more employee hours and increase staff beyond an earlier plan announced in February. These added costs and higher wages are expected to depress per-share profit this year by 24 cents, higher than the 20 cents Walmart had previously forecast.
E-commerce. Walmart is playing catch-up in cyberspace against rival Amazon (AMZN). According to Yarbrough, growth in this money-losing business has slowed in recent quarters even as spending there has increased. Walmart cut its fiscal year forecast for e-commerce, unnerving investors further.
"For years, Walmart was the retailer that everyone responded to and everyone feared," Yarbrough said. "Today, I feel like Amazon has turned the tables. Walmart is chasing Amazon and copying the things that they do."
Competition. Much has been made about macroeconomic conditions, but some Walmart rivals that also target the budget-conscious consumer are doing better. TJX (TJX), the parent of TJ Maxx, today reported better-than-expected results and raised its guidance. Dollar Tree (DLTR) is due to report its latest quarterly earnings Sept. 1, and Wall Street is expecting the kind of revenue and profit surge that Walmart hasn't shown in a long time.