The day before yesterday took the market by surprise, when the retail bellwether Wal-Mart Stores Inc.WMT disappointed investors with a bleak outlook that resulted in a massive sell-off. The news of the dismal projection dragged the WMT stock down by 10% -- the sharpest drop witnessed in nearly three decades. However, the fall was arrested yesterday, when the scrip moved down just 1.2%, indicating that the jitteriness following the announcement at the company's annual investor day has calmed to an extent but not yet bottomed out.
Reason Behind Sell-Off
The retail giant dismissed its modest net sales growth forecast of 1-2% for the ongoing fiscal 2016 due to a strong dollar, and now expects net sales growth to be flat. Additionally, it projects earnings per share to drop 6-12% in fiscal 2017 driven by increased spending on global e-commerce initiatives, wage hikes and workers' training. However, the company anticipates net sales to increase 3-4% annually over the next three years and earnings to resume growth in the 5-10% band in fiscal 2019.
Wal-Mart warned that it is beefing up its investments in the e-commerce and digital space to fend off competition from big players like Amazon.com, Inc.AMZN . It plans to spend $12.4 billion in fiscal 2016 and $11 billion in the next fiscal on brick-and-mortar store expansion, and in the e-commerce and digital space. In fact, fiscal 2017 will be the heaviest year of investments, with $1.5 billion in additional spending related to increased wages and staff training.
We note that increase in labor costs along with the company's efforts to overhaul its stores and invest in its online operations may weigh on its bottom line.
Spillover Effect on Retail Stocks
The ripple effect of Wal-Mart's bleak outlook was clearly visible across consumer-oriented stocks that also traded in red - Best Buy Co., Inc.BBY nosedived 6%, Dollar General CorporationDG plunged 4.2%, Target Corp.TGT fell 3.5%, Dollar Tree, Inc.DLTR tumbled 3.3% and Costco Wholesale Corp.COST dropped 1.6% on Oct 14.
After decades of robust growth, Wal-Mart has been facing severe challenges since the last few quarters and showing signs of acute weakness. This Zacks Rank #5 stock has been disappointing with its performance due to sluggish U.S. sales. It has been 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.
Was the Slump in Retail Stocks Justified?
The entire retail space appeared to be struggling, when the retail behemoth, Wal-Mart, provided a soft forecast. But the big question is - was this slump justified? Analysts pointed that though macroeconomic issues remained in place, it was the company-specific news that took a toll on the other retail stocks. A close look will reveal that most of the stocks that witnessed a downward spiral ended up trading in green yesterday - Dollar Tree, Dollar General, Best Buy and Costco rose 2.3% 2%, 1.9%, 1.3%, respectively.
Investors are already grappling with the flagging Chinese economy, the Eurozone debt crisis and the pending decision over the first rate hike, and amid such a scenario the news of Wal-Mart lowering guidance has only added fuel to the fire. Moreover, the weak September retail sales data caught many investors off guard.
The Commerce Department unveiled that retail sales inched up 0.1% last month after being flat in August. We believe that persistent weakness in the energy sector, a strengthening dollar and China issues will continue to unnerve investors.
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