Wal-Mart drops earnings outlook 6% to 12%, share price falls (Updated)

Wall Street did not like what Wal-Mart execs had to say on Wednesday (Oct. 14) about the heavy investments in people, technology and supply chain changes. The investments resulted in the retailer lowering its earnings guidance by as much as 12% for next fiscal year.

“Fiscal year 2017 will represent our heaviest investment period. Operating income is expected to be impacted by approximately $1.5 billion from the second phase of our previously announced investments in wages and training as well as our commitment to further developing a seamless customer experience,” said Chief Financial Officer Charles Holley during the retailer’s annual investor conference in New York City on Wednesday.

That prompted shareholders to begin selling off Wal-Mart stock (NYSE: WMT) as soon as the lower guidance was announced. Shares tumbled Wednesday more than 9% to $60.33 in heavy volume and setting a new 52-week intraday low of $60.14.

Holley said despite the lower earnings growth in fiscal 2017, the company expects it will grow sales 3%-4% annually over the next three year period and add between $45 billion and $60 billion in revenue.

He said that is equal the size of adding a Fortune 50 company to the Wal-Mart bottom line. He said capital expenditures will be about $11 billion for fiscal 2017 and remain flat the next two years. 

FEWER STORE OPENINGS, CLEANER STORES
For next year, Wal-Mart plans to scale back on the number of stores its opens to around 55 new supercenters with about 90 new neighborhood market locations. The new store count is down from previous years as the retailer said it is being more thoughtful about the locations where it wants to place its stores for the best success.

Analysts questioned execs on how they expect to raise top line sales, when the new store count is down, margins remain compressed and store labor costs are rising. Walmart U.S. CEO Greg Foran did not provide specific details in his response, but did say the number of better performing stores on the “Fast, Clean and Friendly” scale is now up to 67% of the U.S. stores. Foran said when stores are performing well on those metrics, they also see higher comp sales.

“It’s a given,” he said. “I know my team signed up for the 3%-4% gain in sales and we will get there.”  

Holley reminded the analysts that Wal-Mart’s sales are on track to grow 3.5% this year. Company execs have also said about 75% of $1.5 billion incremental investments next year are centered around the second step-up in hourly wages to $10 effective in February.

Wal-Mart CEO Doug McMillon said he wasn’t sure why analysts seemed so surprised with this news given it was announced in February. 

“Perhaps we did not provide enough details at that time about this incremental investment,” he added during the Q&A session of the event.

McMillon told investors that the company’s investments in people are starting to pay off. He said it’s also crucial if Wal-Mart expects to win in the future of retail.

“We’re encouraged by recent customer feedback and will continue to get stronger. 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," McMillon said.

THE PUSH TO LOWER PRICES
Beginning in fiscal 2018, Wal-Mart will refocus on lowering prices, according to McMillon. He said the immediate focus on store operations, but “price investment” – the retailer’s term for lowering prices – is coming. McMillon said the company would be thoughtful about how it lowers prices which will also include unlocked potential in private brands.

“Think of this way, it’s better to clean up your house before you invite people over,” McMillon said.

No specific price investment amount was given except to say “billions of dollars over the next few years, beginning in 2018.”

Foran said lowering prices would also include tweaking quality assortments. He said on items like Tide, it’s about having the lowest price, but when it comes to fresh produce like avocados and red meat, Wal-Mart also must present quality at a value relative to other retailers.

SHAREHOLDER OUTLOOK
By fiscal 2019, Wal-Mart expects earnings will rebound by 5% to 10% from the investment in prior years as the investments in people and supply chain begin to pay off.

And in an effort to lessen the sting for shareholders, some of which are Walton Family members, Holley said the company plans to use its new $20 billion stock repurchase agreement over the next two years to be paid for by an estimated $80 billion in free cash over the next three years. Wal-Mart has not been aggressively buying back its shares this year. More than $8 billion remained on the previous $15 billion repurchase agreement that was updated recently by the board.

At $60 per share, optimists think now is good time for Wal-Mart to begin buying back its shares given the price hasn’t been this low since 2012.

One thing seems fairly certain and that’s the dividend paid to Wal-Mart shareholders. Holley said the company’s 42-year consecutive record of increasing its annual dividend rate is very important to the retailer. The Walton Family are the largest shareholders of the stock, owning a combined 51% of the outstanding shares.