It’s not cheap to be Wal-Mart Stores Inc.
While the brick-and-mortar giant has honed the process of delivering low prices to millions into a high art, it now faces a new set of evolving and more expensive challenges.
The old methods are no longer a sure thing, and the Bentonville, Ark.-based company finds itself:
• Spending in e-commerce to build an omnichannel base.
• Investing in its workers, including an upcoming hike to its minimum wage.
• Revamping stores to sharpen presentation.
• Slowing its store rollout plans and focusing on smaller doors.
• Building on its digital base in China.
In short, Wal-Mart is trying to make the tough choices it needs to transform its business, but has no guarantee that it will succeed. All of that spending takes a toll on the bottom line. The retailer told analysts at a meeting several months ago, for example, that it planned to shell out $1.2 billion to $1.5 billion in capital expenditures to build its digital offering across its global business.
On Tuesday, it was clear the investments thus far have yet to pay off. Wal-Mart cut its profit outlook for the year and posted second-quarter earnings that fell short of analysts’ estimates, sending its stock down 3.4 percent to $69.48 Tuesday. The retailer delivered earnings of $1.08 per share, a drop from $1.21 from continuing operations a year earlier and short of the Wall Street estimate of $1.12.
Second-quarter net income from continuing operations fell 11.4 percent to $3.48 billion as revenues increased just 0.1 percent to $120.23 billion with a 1.5 percent comparable-store sales gain.
The short fall signaled more than just a tough quarter, but a continuing evolution in the company’s business.
Wal-Mart rolled back its full-year earnings per share to range from $4.40 to $4.70 instead of the $4.70 to $5.05 previously projected. The company expects incremental investment in its e-commerce business is expected to equal 6 to 9 cents a share this fiscal year.
The stated goal at an analysts meeting last October was to expand e-commerce sales by 25 percent this year and ramp up to growth of up to 40 percent through 2018. Wal-Mart is still in pursuit of those growth rates as second-quarter e-commerce sales grew just 16 percent.
The company is chasing what it sees as $5 trillion in global retail growth over five years, with a disproportionate share of that increase coming from digital.
“The changes we need to make require investment, and we’re pleased with the steps we’ve taken,” said Doug McMillon, president and chief executive officer, in a pre-recorded message to investors with second-quarter results Tuesday. “We made continued progress toward our plan this quarter. Even if it’s not as fast as we’d like, the fundamentals of serving our customers are consistently improving, and it’s reflected in our comps and revenue growth.”
Wal-Mart’s quandary has become an increasingly familiar strain in fashion: Reinvention, while necessary, is difficult to pull off, expensive and not necessarily quick. Target Corp., Macy’s Inc., Kohl’s Corp. and most of the rest of retail are all trying to figure out how to fend off Amazon.com. That means not just selling attractive goods at attractive prices, but connecting with customers digitally and not disappointing when shoppers cross into their stores.
As the largest, Wal-Mart might have both the highest hurdle to clear, but also the greatest opportunity, since it has customer traffic and a vast store base.
But Wal-Mart could also be its own toughest act to follow.
“Doug McMillon’s job as ceo is not an easy one, and we do not envy the task of energizing store managers and associates when the numbers are tough,” said Mark Miller, in a note to clients. “So the analogy provided today that Wal-Mart can win with technology, data, and mobile—just as supercenters drove reinvention at Wal-Mart in 1996—is an inspiring idea, yet the reality appears to be that profits from large-format retail stores are sliding faster than the vision of being the best of the online and offline worlds can be realized.”
And even if Wal-Mart is making the right moves now, absorbing some pain in the meantime, investors might not be satisfied.
“They are absolutely making the right move to go omnichannel,” said Ivan Feinseth, chief investment officer of Tigress Financial Partners. “I just think they will get hurt by the law of numbers. You want a company that grows. They’ve just gotten too big to keep shareholders happy.”
That sentiment was echoed by retail expert Jan Kniffen of Kniffen Worldwide Enterprises who said, “They are making all the right moves. You can’t let Amazon own that side of the business.” Kniffen though pointed out that Amazon makes no profit — something that won’t fly with Wal-Mart shareholders. “People will look at the investment and want a return on it. They have a better chance of making it work, but no one’s making money online yet,” he said.
Christopher Horver, analyst at JPMorgan Chase, noted that Wall Street was told in October that the investment period for e-commerce would peak for 18-24 months and suggested that, if it lasts longer, concern will grow.
In the second quarter Wal-Mart opened two new fulfillment centers and has two more set to open this quarter with more are planned for 2016. “In order to leverage the brick and mortar assets, they have to build the online store,” said Charles O’Shea, Senior Analyst at Moody’s Investors Service, “Costs are costs.”
However, 55 percent of Wal-Mart’s business is in grocery, an area that doesn’t translate well to online shopping and will make this transition difficult.
The investment in the digital realm comes at a time when the brick-and-mortar stores are costing more to run. Wal-Mart, which has long been dogged for how much it pays its employees, is slated to boost starting salaries to $10 an hour in February, up from $9 an hour currently.
The firm has also added more worker hours, with more shifts at the registers and in the stock room in an effort to improve customer service and the general store experience, while creating more department manager jobs and tweaking schedules to try to keep employees happy.
The size and quantity of the stores being opened are being reassessed and Wal-Mart said Tuesday that it would cut back on store openings. The company previously planned to open between 180 and 200 Neighborhood Markets and they now expect that to be between 160 to 170, including the 51 stores already opened. The firm is still on track to build 60 to 70 superstores.
The focus will be on the quality of store not quantity of stores.
In the past, it was enough to keep the company growing by building more and bigger stores. Over the past decade, Wal-Mart has doubled its revenues almost wholly on its physical locations. Now the company is changing the store format. The supercenters will be focused on the customer’s big shopping trips, with the smaller Neighborhood Market and Wal-Mart Express stores to be used for quick trips.
These smaller stores will need fewer employees than the large supercenters, but it takes time to make such adjustments. Plus, these stores are now being brought into the e-commerce strategy. The physical stores will allow shoppers to buy goods online and pick them up in the store. Charlie O’Shea said, “Wal-Mart has the most compelling brick and mortar strategy and will have a significant advantage over an online only retailer.”
The e-commerce experience is also very important to Wal-Mart’s Chinese business. Wal-Mart spent approximately $760 million to buy the remaining shares of Yihaodian, a strategic acquisition for e-commerce growth in China.
Yihaodian now has 100 million registered customers and sales there grew in double digits. Unfortunately for Wal-Mart, this comes as China’s economy is weakening and Wal-Mart stores there posted negative comparable-store sales, declining 1.4 percent. Wal-Mart China is focusing on cutting expenses and hoping that new initiatives, such as the program that lets uses buy goods online and pick them up in store, will boost sales.
All off that adds up to a lot for any retailer, even Wal-Mart.
But McMillon said the company would continue to be guided by a focus on its core goal — serving consumers.
“Winning in the future requires change,” the ceo said. “Change in this case requires investment. Investment pressures short-term earnings. Our strategy is designed to create robust and sustainable growth that will deliver returns to shareholders. We obviously want to do that in the short and long term, and it all starts by winning with customers.”