Shares of Wal-Mart Stores Inc.WMT hit a 52-week low of $58.37 on Oct 16, and eventually closed at $58.89 after the retail giant reported disappointing guidance for fiscal 2017. In fact, shares have been losing momentum since the company reported dismal second quarter fiscal 2016 results and lowered its fiscal year guidance on Aug 18. Wal-Mart's shares have declined more than 15% since its last earnings results.
Weak Fiscal 2017 Guidance
On Oct 14, the retail giant issued an extremely disappointing guidance for fiscal 2017 at its annual investor day.
The retailer forecast that its sales in fiscal 2017 would be flat due to stronger-than-anticipated negative impact of the dollar. Wal-Mart had previously forecast sales growth of 1% to 2%. For fiscal 2017, Wal-Mart stated that its earnings could fall by as much as 12% due to higher wages and increased spending on e-commerce activities.
This guidance cut is on top of the lowered earnings outlook for fiscal 2016 as announced during the second quarter fiscal 2016 conference call in August. This signals that Wal-Mart's challenges are far more serious and likely to persist in the near term.
We note that Wal-Mart is undertaking a turnaround plan in order to improve its sales, business operations and customer service. However, still the retailer is facing severe challenges and showing signs of acute weakness.
Wal-Mart has been posting disappointing results due to sluggish U.S. sales. It is also facing intense competition on all fronts, ranging from dollar stores to the traditional grocery store chains and online business. Its international operations are also under pressure with a stronger dollar eating into sales.
At the same time, Wal-Mart projects slower growth in new stores. Price competition is one of the reasons for the slower growth. Wal-Mart is finding it difficult to compete with local grocers in some markets, which compelled it to scale back expansion plans for smaller stores.
Wal-Mart also expects to incur huge e-commerce expenses over the near term. In an effort to compete with the biggest online retailer Amazon.com, Inc. AMZN and to improve customer service, Wal-Mart is aggressively investing in its e-commerce business.
Wal-Mart has also pledged to spend $1.5 billion to raise employees' wages and give them extra training in fiscal 2017. The initiative of paying higher wages is expected to help reduce turnover and increase retention. It will also improve its customer service and ultimately that will encourage shoppers to spend more.
But it will further raise the expense burden on the retailer. We note that Wal-Mart had increased its minimum wage to $9 an hour in April, and expects to increase it to $10 per hour in Feb 2016. Higher labor costs along with the company's efforts to overhaul its stores and invest in its online operations will weigh on its earnings.
Wal-Mart has a Zacks Rank #5 (Strong Sell).
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