Wal-Mart expected to report lower earnings, wage and training spending to hurt margins

Wall Street doesn’t expect a glowing quarter from Wal-Mart when the company reports earnings Thursday (May 19), despite a respectable overall retail sales gain in April.

The consensus estimate among Wall Street analysts pegs Walmart’s fiscal first quarter net income around $2.69 billion, or 89 cents a share. Projected net income is lower than than the $3.28 billion, or $1.03 cents per share earned in the year-ago period. The foreign currency impact is expected to be 3 cents per share.

Revenue is projected to be $113.17 billion, down 1.4%. Top line sales will likely be hurt by foreign exchange costs and mildly deflationary prices in fuel and some foods.

Walmart U.S. has delivered positive comps in recent months as a result of lower fuel prices, which boosted consumers’ spending power. E-commerce has also contributed to company sales. The retailer expects the trend of positive comps at Wal-Mart U.S. to continue but at a sluggish rate of 0.5% in the first quarter. One year ago comparable sales were up 1.1%.

Wal-Mart executives previously forecast lower profits for this year as the company continues to invest heavily in technology and workforce which it hopes will pay off in time.

“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 former Chief Financial Officer Charles Holley during the Oct. 14, retailer’s annual investor conference in New York City.

Since then, Wal-Mart announced the closure of 269 stores which dinged fourth quarter operating income to the tune of $729 million. Analysts say those closures will likely impact earnings through the first half of this year.

The U.S. division for Wal-Mart comprises about 63% of the company’s total sales and estimates indicate U.S. sales will be be up 1.8%  year-over-year to roughly $71.512 billion. Analysts see the U.S. division as a turnaround in progress with more time needed to carry out the changes underway.

Sam’s Club is projected to see a 2.9% drop in overall sales from a year ago. Estimates for Sam’s Club sales are $13.479 billion, down from $13.891 billion a year ago. Lower fuel prices are a major reason why Sam’s Club’s top line revenue will be off. On a positive note, membership income is expected to rise to $824 million, up from $793 million a year ago. Analysts see Sam’s Club as a disappointment and expect management changes to occur this year.

The international division is expected to see a 6.6% decrease in overall sales revenue from a year ago. This segment is pegged to report $30.278 billion in sales for the quarter, down from $32.424 billion a year ago. Analysts expect the global market to be soft overall with areas like Mexico doing well while Japan and China face challenges.

Olive Chen, analyst with Cowen and Company, said key challenges faced by Walmart in this fiscal year are somewhat beyond the retailer’s control — food deflation and strong U.S. currency. Chen cites a tough year-over-year comparison given sluggish traffic momentums, tighter margins related to food deflation and ongoing challenges within electronics and general merchandise. On the upside Chen said Wal Mart’s investments in cleaner and better run stores appear to be to working as consumer satisfaction ratings are slowly improving.

Cowen gives Wal-Mart a “Market Perform” rating while Stephens Inc. analysts rate the retail stock a hold given Walmart’s investment focus for fiscal 2017.

Neema Tamminga, analyst with Piper Jaffray, said since 2007 untethered commerce via mobile phones has sent more shoppers online and that is a problem for retailers with a large brick and mortar footprint. She also believes the pending election will continue to weigh on consumer’s as the two frontrunners are about equally disliked by Americans. Tamminga said the consumer is a wild card, which is a concern for retailers.

Consumers are spending but not on everything, according to Jack Kleinhenz, chief economist for the National Retail Federation. He said the costs of rent and health care have risen, causing Americans to spend more of their income on those needs which may be taking a toll on other discretionary spending. He said when consumers do dip into their discretionary income, they – particularly millennials – are opting to do so for things like services, concert tickets or dining out. More broadly speaking, they’re also spending on home renovations and automobiles.

“They have the ability to spend,” Kleinhenz said. “People are buying big-ticket items and cars are still very attractive.”

Retail sales were up 1.3% in April, marking the largest gain since March 2015, according to a report Friday (May 13) from the U.S. Department of Commerce. The April rise follows a 0.3% gain in March. Excluding autos, fuel, building materials and food services, April retail sales were up 0.9%.

However, much of the rise in core retail sales were from “nonstore,” or e-commerce companies like Amazon. Retail trade sales in April were up 1.4% from March, and up 2.7% compared to April 2015. Nonstore retailers were up 10.2% compared to April 2015.

Shares of Wal-Mart stock (NYSE: WMT) closed Friday (May 13) at $64.94, down $1.92. So far in calendar 2016 Walmart share price is up 5.94% from $61.46. Over the past 52-weeks the share price has ranged from a low of $56.30 to a high of $79.94.