Walmart Profit Falls on Pay Raises, Currency Shifts

Earns Walmart
Walmart Stores (WMT) reported sluggish sales and a 7 percent drop in first-quarter profit as worker pay raises, spending on e-commerce and currency fluctuations put pressure on the bottom line at the world’s largest retailer.

The company also reported a 1.1 percent increase for a key sales measure at its U.S. Walmart stores, its third consecutive quarter of increases. However, that growth came below analyst expectations.

Walmart’s profit and total sales missed Wall Street estimates. The weakness adds to questions about the health of consumer spending. The latest government retail sales figures showed spending was flat in April, and Macy’s (M), Kohl’s (KSS) and J.C. Penney (JCP) announced disappointing results despite low gas prices and improvements in the job market.

The retail industry also is battling temporary issues, such as the labor dispute at West Coast ports that delayed shipments of merchandise.

Walmart itself is a barometer of consumer spending. Its challenges reflect the struggles of its low-income shoppers, who are being squeezed by stagnant wages and higher living costs. Walmart pointed out that its customers were either pocketing tax refunds and their savings from lower gas prices, or using them to pay pay down debt or bills like utilities.

Walmart also is facing fierce competition from the likes of online king (AMZN), dollar stores and grocers. It’s also dealing with a shift among shoppers seeking the convenience of small stores or buying on their mobile devices and PCs.

In response, Walmart is rapidly opening smaller stores. It is also increasing its spending for its online operations to between $1.2 billion and $1.5 billion this year, up from $1 billion last year. It announced last week it was testing an unlimited free-shipping service for $50 a year, undercutting Amazon’s popular Amazon Prime, whose annual dues are $99.

In Walmart’s U.S. division, the company is trying to improve it selection and customer service, while making sure it has the lowest prices. Walmart is also aiming to improve the freshness of its produce.

The company expects to see improved results by the holiday season, according to Greg Foran, who had been president and CEO of Walmart Asia and took over Walmart’s U.S. business last summer.

Higher Wages

As part of the strategy, the company raised the minimum wages for its hourly workers to $9 an hour in April. By February, all hourly workers will make at least $10 an hour.

That comes at a cost. It’s part of a $1 billion investment in its workforce that also includes improved training.

Walmart is hoping that by investing in its people, Walmart will improve customer service, resulting in higher sales.

“We’re not interested in reaching our goals, but reaching them in a way which is sustainable for the long term,” Foran said. “This requires a steady execution, a pace that is fast but calculated, and one that allows us to get it right.”

But such investments are squeezing profits in the short term.

Quarterly Results

Walmart said that net income was $3.34 billion, or $1.03 a share, for the three months that ended April 30. That compares with $3.59 billion, or $1.11 a share, a year earlier. Net revenue was down slightly to $114 billion, from $114.2 billion in the year-ago quarter. Analysts were expecting $1.04 a share and revenue of $116.27 billion, according to Zacks Investment Research.

By division, the U.S. Walmart division, which accounts for 60 percent of total sales, had a 3.5 percent increase in sales to $70.2 billion. Its Sam’s Club division had a 3 percent decline in revenue to $13.5 billion. And its international division saw a 6.6 percent decline in sales to $30.3 billion. The company is focusing on improving its business in Brazil, China and Mexico.

Walmart said that its smaller Neighborhood Markets, which are a quarter of the size of a typical Walmart supercenter and focus on groceries, enjoyed a 7.9 percent increase in sales at stores open a least a year.

Walmart shares have declined roughly 7 percent since the beginning of the year, while the Standard & Poor’s 500 index has climbed slightly more than 3 percent. The stock has risen almost 4 percent in the last 12 months.

Shares fell $1.87, or 2.3 percent to $78.05 in premarket trading.

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