WMT Walmart Inc

By Sarah Nassauer 

Wal-Mart Stores Inc. executives warned that profits will miss their goals this year, an admission that the world's largest retailer is spending heavily to generate even modest sales growth.

On Tuesday, Wal-Mart said its quarterly profit fell 15% from a year ago and the company lowered its earnings targets for the current quarter and fiscal year. Wal-Mart cited higher costs from adding store hours and raising hourly worker pay, as well as currency fluctuations and more plebeian problems like store theft.

Wal-Mart shares fell 3% in Tuesday trading to $69.78. The stock has lost 19% of its value this year and now trades below Amazon.com's market capitalization.

The spending has helped reverse a sales slump as Wal-Mart draws more shoppers to its stores and customers spend slightly more when they visit. Sales at U.S. stores open for at least a year increased 1.5% in the latest quarter, the fourth quarterly increase after a long period of declines.

On Tuesday, the company said it would increase store hours beyond a plan laid out in February and add more staff to speed checkout lines and ensure shelves are better stocked. But those changes, coupled with higher hourly wages, are now expected to reduce its fiscal 2016 per-share earnings by 24 cents, compared with an earlier 20-cent cost.

In April Wal-Mart raised the minimum hourly wage paid to employees to $9 and said it would boost that to $10 for many employees by February. In addition to higher wages, Wal-Mart's profits are being squeezed by currency fluctuations and lower-than-expected reimbursements for its pharmacy business. The company on Tuesday also blamed an increased in shrink, or goods that are stolen or lost in the chaos of a packed warehouse.

"These issues will present continuing profit challenges for the remainder of the year. We are certainly disappointed. But we are not standing still," said Greg Foran, chief executive of Wal-Mart U.S. in a conference call. Wal-Mart U.S. accounts for around 60% of the company's total sales.

Overall, second-quarter profit fell to $3.48 billion, or $1.08 a share, in the quarter ended July 31, down from $4.09 billion, or $1.26 a share, a year earlier. That was at the low-end of the company's forecast for the second quarter. Total revenue was $120.2 billion, flat from a year earlier.

The company is now expecting fiscal year earnings of $4.40 to $4.70 a share, down from its previous forecast for $4.70 to $5.05 a share. For the current quarter, Wal-Mart forecast earnings of 93 cents to $1.05 a share.

During a prerecorded conference call, Wal-Mart CEO Doug McMillon described the company as being in a "period of change," and finds telling a 1996 magazine article hung in his Bentonville, Ark., office that asked, "Can Wal-Mart Get Back the Magic?"

Wal-Mart is in the midst of sweeping changes to its operations in U.S. stores. It is beginning to change its inventory management system so that employees can more often stock shelves from the sales floor, not the backroom. And it is asking companies that sell their products on Wal-Mart shelves to spend less on marketing and more on lowering prices. In June it started mailing out around 10,000 contract renegotiation letters to suppliers, often asking them to pay additional fees to warehouse products and other measures.

The retailer has also revived its "shrink training program" for employees, said Mr. Foran in the conference call. Last quarter Wal-Mart said shrink was a "key urgent agenda item," already eating into profits.

Some cost-cutting measures are likely coming. "For the back half of the year we will manage these items closely with a continued commitment to efficiency, cutting costs where appropriate, even in a period of investment," said Mr. McMillon.

The results add to a string of mixed results from retailers in recent weeks. Home Depot Inc. on Tuesday posted higher profit and sales as homeowners spent on big-ticket items, but department store retailers Macy's Inc. and Kohl's Corp. both reported tepid second-quarter sales. U.S. consumer spending on items outside of cars--such as clothes, furniture, building supplies and other everyday items--rose 0.4% in July, the third consecutive month of gains.

Despite its investments on its web business, Wal-Mart lowered Tuesday its fiscal year forecast for growth of e-commerce sales. It now expects a percentage increase in "the mid-to-high teens," down from a previous prediction that sales would grow in the mid-20s range. The weakness is driven by poor international performance, especially in the U.K. and Brazil, said Neil Ashe, CEO of global e-commerce for the retailer during a conference call. Global e-commerce sales rose 16% in the second quarter, compared with 17% in the first quarter of this year and 22% during the same period last year.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

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(END) Dow Jones Newswires

August 18, 2015 12:19 ET (16:19 GMT)

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