Pay Raises, Store Spruce-Ups Crimp Wal-Mart’s Profit

Wal-Mart’s second-quarter earnings report was a mixed bag: Its investments to overhaul its stores are helping to perk up sales, but they’re causing more pain to the bottom line than expected.

The world’s largest retailer cut its annual earnings outlook Tuesday because its profits are being squeezed by pay raises for workers and efforts to make its stores cleaner and friendlier and speed up service. It also reported a 15.1 percent drop in second-quarter profit. Currency fluctuations are also dragging down results.

However, the retailer posted its fourth straight quarter of increases for an important sales measure, and its third straight increase in customer counts for its U.S. Wal-Mart stores.

Wal-Mart, based in Bentonville, Arkansas, is facing challenges on all fronts that have resulted in its shares falling 16 percent this year. Its low-income shoppers are still struggling in an economy that is slowly recovering, though lower gas prices are providing some lift. The company is also facing increasing competition from online king Amazon.com and dollar stores, which are pulling in shoppers seeking low prices and convenience.

“The changes we need to make require investment, and we’re pleased with the steps we’ve taken,” Wal-Mart CEO Doug McMillon said, according to a transcript of a recorded message to investors. “We made continued progress towards our plan this quarter. Even if it’s not fast as we like, the fundamentals of serving our customers are consistently improving.”

Wal-Mart has been doing a number of things to improve its results. It’s increasing spending for its online operations to between $1.2 billion and $1.5 billion this year, up from $1 billion last year. It’s opening fulfillment centers dedicated to e-commerce that should speed up delivery and put more items in one box. And it’s testing an unlimited free-shipping service for $50 a year, undercutting Amazon’s popular Amazon Prime, which costs $99 annually.

Wal-Mart’s U.S. division, which accounts for 60 percent of the company’s total sales, is undergoing a major overhaul under new U.S. CEO Greg Foran.

The company is trying to improve pricing and selection as well as beef up customer service. It raised the minimum wages for its hourly workers to $9 per hour in April. By February 2016, all hourly workers will make at least $10 per hour.

Those raises are part of a $1 billion investment in its workforce that also includes improved training. Wal-Mart is counting on happier employees to improve the experience for customers. The company is freeing more workers to be on the floor or running registers during its peak hours.

But the investments are battering the bottom line.

The company earned $3.48 billion, or $1.08 per share, in the quarter that ended July 31. That compares with $4.09 billion, or $1.26 per share, a year ago.

The results did not meet Wall Street expectations. The average estimate of 13 analysts surveyed by Zacks Investment Research was for earnings of $1.12 per share.

The company also said that reduced reimbursement rates from pharmacy benefit managers are hurting profit margins.

Wal-Mart posted revenue of $120.23 billion in the period, beating Street forecasts. Eleven analysts surveyed by Zacks had expected $120.06 billion.

Revenue at U.S. Wal-Mart stores open at least a year rose 1.5 percent. The measure at its small-format stores called Neighborhood Markets was up 7.3 percent. At Sam’s Clubs, that measure rose 1.3 percent.

Wal-Mart now expects full-year earnings to be $4.40 to $4.70 per share. That’s down from the original forecast of $4.70 to $5.05 per share.

The company also said that it now expects global online sales to be up in the mid-to-high teens for the current fiscal year because of slowing economies. That compares with the original forecast for growth by a percentage in the mid-20s. The company posted a 16 percent increase in global e-commerce in the second quarter.

In trading Tuesday, Wal-Mart shares fell $2.43, or 3.4 percent, to $69.48.