5 obstacles to a Walmart turnaround
Douglas McMillon has urged investors to be patient as he has tried to turn around Walmart's (WMT) financial fortunes ever since he was named CEO of the world's largest retailer in 2013.
Speaking Tuesday to Wall Street analysts, McMillon argued that the company's objective is to improve its short - and mid-term performance while positioning the chain for long-term growth through efforts such as as raising employees' wages and boosting Walmart's e-commerce operations.
"We've made progress, but we still have a lot of work to do," he said. "We're pushing to change faster as we continue down the right path to deliver long-term value to both customers and shareholders."
Walmart's latest quarterly results, unfortunately, disappointed Wall Street analysts. Net income at the Bentonville, Arkansas, company declined 7 percent to $3.34 billion, or $1.03 per share, versus $3.58 billion, or $1.11, a year earlier. Revenue fell 0.1 percent to $114.8 billion. Comparable sales, a closely watched metric of activity at existing locations, rose 1.1 percent excluding fuel.
Of course, "pushing faster" is easier said than done. McMillon faces at least five formidable challenge in righting Walmart fiscal ship:
1) Wall Street analysts often speak about "The Law of Large Numbers," which is basically a way of saying the bigger a company is, the harder it is to grow rapidly. Walmart is huge by any standard. It employs 1.3 million people in the U.S., the most of any private company. It has more than 11,450 locations in 17 countries.
2) Many of Walmart's problems are years in the making because it has underinvested in its stores and staffed them with too few employees to keep their shelves stocked and answer customers' questions. McMillon has made improving customer service a priority, but as Brian Yarbrough, an analyst with Edward Jones noted: "It always takes a while for these customers to come back." He rates Walmart stock as a "hold."
3) In theory, Wal-Mart was supposed to benefit from an improving economy and lower gas prices. However, in the words of a Federal Reserve paper, the economy was "shockingly weak" with first-quarter GDP growth of 0.2 percent. "He is just dealing with an economy that is very sluggish right now," Ron Friedman, a Los Angeles-based retail consultant with Marcum's National Retail/Consumer Products Industry group, told CBS MoneyWatch. "Walmart never delays orders. They push out delivery dates."
4) Wal-Mart's competitors aren't standing still either. According to Friedman, TJX (TJX), parent of TJ Maxx, in particular has done a "fabulous job in the marketplace" by appealing to teen shoppers. Or take groceries, now a key business for Walmart, and one where it had been able to take market share from existing chains. The incumbents, though, fought back and competed directly on price and have regained share, Yarbrough said. Publicity about wilted vegetables didn't help Walmart.
5) Walmart has gotten loads of press for raising workers' wages, and although Yarbrough argues that the company made the right decision, he also noted, "it's going to pressure their ability to grow profits." Janney Capital Markets analyst David Strasser added in a note to clients that the higher wages will benefit Walmart because employees will spend their higher salaries. He rates the stock as a "buy."
Shares of Wal-Mart fell 4.4 percent on Tuesday to $76.43, indicating that many investors are well aware of the challenges the retailer faces. They've slumped more than 11 percent since the start of the year and aren't likely to rally until McMillon can prove he is indeed getting Walmart back to growing again.