A Wal-Mart store

Wal-Mart Stores Inc. cut its outlook for the year and posted second-quarter earnings that fell short of analysts’ estimates, sending its stock down 3.5 percent to $69.69 in early trading.

The discount retailer delivered earnings of $1.08 per share, a drop from last year’s $1.21 from continuing operations and short of the Wall Street estimate of $1.12, according to the Thomson Reuters consensus. Net income from continuing operations fell to $3.48 billion from $3.92 billion.

Wal-Mart also sliced its full-year earnings per share forecast to $4.40 to $4.70 from $4.70 to $5.05.

The company blamed the earnings shortfall on margin pressure from pharmacy reimbursements and increased shrinkage as well as higher wages. The company also said that these problems would continue to be challenges for the rest of the year. Wal-Mart raised its minimum wage for starting employees to $9 an hour, which gave half a million employees an immediate raise. Wal-Mart also gave workers more hours to improve customer service. Additionally, the retailer is adding more department manager jobs and improving schedules.

The Affordable Care Act, or Obamacare, is clearly affecting the company as more customers are benefiting from greater drug insurance coverage. As a result of the law, there were fewer high-margin cash transactions in the pharmacy. Wal-Mart also saw weakness and negative comparable-store sales in the entertainment business with a shift from post-paid to installment wireless plans.

On the cost side of the equation, Wal-Mart spent heavily to improve its e-commerce operations. The company opened two new fulfillment centers and will open two more this quarter, with more planned for 2016. There is also a new technology platform and fresh omnichannel efforts at Sam’s Club.

Net revenues for the second quarter increased to $120.23 billion, a gain of 0.1 percent from $120.13 billion a year ago. Comp sales went up 1.5 percent. Traffic was strong on general merchandise and the softlines side. The retailer has also seen a shift in back-to-school happening in August and said early indications were positive.

Wal-Mart, which weighs in as the world’s largest and has been emphasizing e-commerce growth, trimmed its plans to open new doors. Wal-Mart had expected to open between 180 and 200 Neighborhood Markets and  now expect to cut the ribbon on 160 to 170, including the 51 stores already opened. Wal-Mart is still on track to build 60 to 70 superstores.

Internationally, the Wal-Mart was affected by the strong dollar resulting in a 9.6 percent sales decline. Comps in Mexico and Canada were strong, but the U.K., Brazil and China were negative. Wal-Mart did spend approximately $760 million to acquire the remaining shares of Yihaodian, a strategic acquisition for e-commerce growth in China.

“Wal-Mart’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,” stated Moody’s vice president Charles O’Shea.

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