Shares of Wal-Mart Stores Inc. declined 10 percent to $60.03 on Wednesday, following the retail giant’s 22nd meeting for the investment community, where the company revealed that earnings are expected to decline every year until 2019.
“We’re taking decisive steps to change and grow our business,” said chairman and chief executive officer Doug McMillon. “We can deliver the financials, but we must run our business better today and for the future. Being the biggest and being the best are not the same thing.”
Earnings will fall in the next two fiscal years, including a 6 to 12 percent drop in 2017. Only in 2019 are earnings per share expected to increase by 5 to 10 percent.
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To put Wednesday’s market capitalization loss in perspective, it amounted to the entire value of Macy’s, or the total market cap of Kohl’s Corp. and Ralph Lauren Corp. combined.
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Wal-Mart invested about $1.2 billion this year to raise associates’ wages to $9 an hour. McMillon said next year, $1.5 billion will be spent to increase wages to $10 an hour. An additional $1.1 billion per year will be spent on e-commerce and technology and the company plans to make price investments in 2016 to 2018 totaling several billion dollars.
Robert Drbul, an analyst at Nomura Holdings, said a continuation of the investments was largely expected, but “the magnitude of the investments is greater than anticipated.” Nomura maintained its fiscal-year 2016 earnings estimate of $4.55 per share, but lowered its 2017 estimate to $4 from its previous guidance of $4.80. “We are also reducing our price target to $70 from $82,” Drbul said, adding, “We believe Wal-Mart is doing the right thing for the business and these investments should pay off.”
Noticeably absent from the meeting were the heads of Sam’s Club and Wal-Mart International. “Clearly, Sam’s and Wal-Mart International are very important to us, but we’ll come back at another time and have a focus on them,” McMillon said. He explained the company’s priorities as winning in North America, e-commerce and technology and making some long-term bets in China. Wal-Mart’s three biggest international businesses remain challenged. McMillon said, “I don’t expect conditions in the U.K., Brazil and China to remain forever.”
Wal-Mart’s stock in mid-January hit a 52-week high of $90.97. Soon after, the shares, which are traded on the New York Stock Exchange, began a precipitous fall. “We made a choice to first invest in technology and people, and those investments are putting pressure on earnings this year and next,” McMillon said. “The dip requires patience from our investors. These are the right steps for our future. It was smart to improve [the customer experience] in stores, and improve in-stocks and checkout speeds.”
“Can we do it all?” the ceo asked rhetorically. “No doubt, our business has become large and broad. It’s important that we evaluate our portfolio. We’ve exited businesses before. We’ll close the stores that need to be closed. We won’t let the breadth of our business distract us. We’re more than open to reshaping our portfolio, but we’re going to be smart about it.”
“Competition is strengthening,” he added. “The hard discounters run on smaller margins.”
Outlining Wal-Mart’s plan, McMillon said: “First, we’ll win with stores. We know customers love shopping in stores, the chance to interact with a product and touch a fabric. The opportunity to buy something right away is satisfying. We’ll keep making stores relevant. We’ll add capabilities to our supply chain and optimize inventory in our system. We’ll become competitive against the best digital players and win on our combination of assets. We’ll be the first to deliver a seamless shopping experience in stores and online and digital.”
Wal-Mart will add $45 billion to $60 billion in new sales over the next three years. The guidance the company provided in August of earnings of $4.40 to $4.70 per share remains uncertain due to the tax rate, which could change if Congress fails to pass “tax extenders.” The retailer said it expects to grow sales by 3 to 4 percent compound annual growth rate from 2016 to 2018. Over last three years, Wal-Mart generated $75 billion cash. Over the next three years, $80 billion in cash will be generated, said Charles Holley, executive vice president and chief financial officer, who is retiring and will be replaced by Brett Briggs.
Wal-Mart will invest several billion dollars into price in 2018 and 2019. “These investments along with the improvement of e-commerce operating losses will provide a sustainable platform,” Holley said. “We anticipate margins climbing back by 2019.”
With the growth of e-commerce, Wal-Mart has been slowing the rate of new store openings. Capital expenditures in 2017 will be $11 billion and remain flat through 2019. “In 2017, Wal-Mart U.S. capex will be down $800 million, driven by moderation of Superstore and Neighborhood Market openings,” Holley said. “International capex will decline $500 million as we evaluate our priorities around the globe, while Sam’s Club will remain flat.”
Neil Ashe, president and ceo of global e-commerce, said customers expect value and low prices at walmart.com “and we’re meeting or beating the prices of four out of five competitors.” The division is building new fulfillment centers, each the size of 20 football fields, in Atlanta, Southern California, Dallas and Florida, where two will open. “We built an Internet company inside of the world’s largest retailer,” he said. “We expect to grow global e-commerce between 20 and 30 percent over the next three years.”
“A strong-performing U.S. business is key to the future success of the company,” said Greg Foran, president and ceo of Wal-Mart U.S. “We’re committed to sales growth. We will grow the top line. We’ll invest in price and be great merchants. We’ll use data and analytics to determine what the customer wants.”
Superstores are still a strong and profitable format and Wal-Mart is hard at work at redesigning them. They’ll be lighter and brighter with upscale signage, a bigger baby footprint and WiFi is rolling out to all units.
“We added 8,000 department managers and empowered them to run their departments,” Foran said. “Next year, we’ll roll out a training program to give them a clearer understanding of what they need to do to get promoted.”
Holley announced that Wal-Mart’s board authorized a new $20 billion share authorization, which the company said it intends to use over the next two years.