Walmart Transition Reflected in 2Q Earnings Report

Wal-Mart Stores Inc.’s quarterly earnings report Aug. 18 caused a bit of a commotion in the financial and business sectors. Earnings for the second quarter were under analysts’ estimates, and the Bentonville company’s stock tumbled as the news spread.

After some time had passed, however, some more thoughtful analysis began to appear in the media. Journalists acknowledged that Walmart is a company that is undergoing changes — some internal, some coming from the outside. Here’s a look at some of the factors that have contributed to Walmart’s numbers:

Wage increases: Earlier this year, Walmart CEO Doug McMillon announced an increase in wages for entry-level associates throughout the company. The news sent shockwaves through the business community and many Walmart competitors, as well as other employers, scrambled to catch up with their own wage increase plans.

Still, the decision to raise wages cost Walmart some of its bottom line, which is reflected in its earnings.

Workforce investment: At the 2015 shareholders meeting in Fayetteville, Walmart executives recognized the importance of store employees and stated their commitment to improving both training and conditions for Walmart workers. Walmart is developing training programs that can help associates with their sales and leadership skills.

In addition, Walmart is concerned about the work environment in its stores. Walmart U.S. CEO Greg Foran announced that Walmart would be changing store temperatures and bringing back the “Walmart Radio” music program to make the workday more comfortable.

E-commerce and omnichannel: Walmart is doing battle for e-commerce loyalty with multiple retailers, including rival-in-chief, Amazon, but also a rebounding Target.com and upstart Jet.com. Walmart is investing heavily in e-commerce and mobile sales in hopes of major returns over time.

As the Associated Press has reported: “Wal-Mart has been doing a number of things to improve its results. It’s increasing spending for its online operations to between $1.2 billion and $1.5 billion this year, up from $1 billion last year. It’s opening fulfillment centers dedicated to e-commerce that should speed up delivery and put more items in one box. And it’s testing an unlimited free-shipping service for $50 a year, undercutting Amazon’s popular Amazon Prime, which costs $99 annually.”

Not all of Walmart’s assets are tied up in employee and e-commerce investments, however. Other factors have also contributed to the Q2 2015 earnings report.

Shrinkage: According to an Aug. 18 report published by Bloomberg News, shrinkage, or the loss of inventory due to theft or damage, is a problem for Walmart. Hard numbers aren’t available, but the problem seems serious enough.

“In the [Walmart] press release, it was mentioned three times,” Bloomberg reported. “In the conference call, it came up 13 times. That’s a lot of shrinkage. Walmart sales, in fact, were pretty decent, but expenses weighed on the company’s profit. Part of those expenses entailed writedowns for inventory that just disappeared.”

Part of the new training for Walmart’s workforce includes educating associates on how to spot thieves and shoplifters.

Pharmacy: Walmart has been developing its health and wellness business. An increase in the number of people who have health insurance has had a negative impact on Walmart’s prescription drug business.

People who have health insurance often have prescription drug plans that cover all or most of the cost of their medicines. Not only has Walmart lost this cash revenue, but drug plan administrators tightly control reimbursements for medications. As a result, Walmart’s pharmacy numbers are down.

What is clear from news reports and Walmart’s own statements is that Walmart is in a period of transition, something that is being recognized by respected analysts.

 “Walmart’s Q2 performance reflects the negative impact on near-term earnings of long-term investments in e-commerce and in its employees that we believe will ultimately bear fruit,” Moody’s vice president Charlie O’Shea told Barron’s blogger Amey Stone. “Investing in the development of an online channel, which is in effect building a second business, is not cheap and results do not happen overnight.”