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Alexandra Biesada

Wal-Mart Invests in Future as Stock Sinks

by Alexandra Biesada | Dun & Bradstreet Editor

October 15, 2015 | No Comments »

stock market dropWal-Mart Stores and its shareholders swallowed a bitter pill yesterday when the company warned that investments in its people and online operation will crimp future profits.

At an investor day, Wal-Mart said it expects its per-share profit to fall 6%-2% in fiscal 2017, which begins in February. The news triggered a 10% plunge in Wal-Mart shares, their worst one-day performance in 17 years, according to The New York Times.

The news wiped out $21 billion in market value and accelerated the slide that has seen Wal-Mart’s shares tumble 30% since the start of the year.

CFO Charles Holley said the company’s pledge to raise wages accounted for 75% of the lowered earnings target. Indeed, Wal-Mart expects to spend an additional $1.2 billion on wages this fiscal year and $1.5 billion more in fiscal 2017. Further investments in its e-commerce arm — $2 billion over the next two years — are also putting pressure on profits.

While painful, yesterday’s announcement was a necessary first step if Wal-Mart is to right itself and avoid losing even more ground to Amazon.com. While Amazon still trails Wal-Mart in terms of annual sales, the Internet retailer is growing at a double-digit rate.

By comparison, Wal-Mart is stuck in the mud. Adding to yesterday’s barrage of bad news, the company slashed its sales forecast for the year, saying it expects net sales growth to be relatively flat.

In July, Amazon surpassed Wal-Mart as the world’s biggest retailer by market value after posting an unexpected profit in the second quarter. The gap has widened since with investors valuing Wal-Mart at about $192.5 billion compared with $254.8 billion for Amazon.

To soften yesterday’s blow, Wal-Mart announced a new $20 billion share buyback program over the next two years. Holley said fiscal 2017 represents the company’s “heaviest investment period” as it strives to build a seamless customer experience that Amazon can’t match.

While $2 billion is serious money, it seems relatively light (as a percentage of sales), especially given how far behind Amazon Wal-Mart is in online retailing. Yesterday’s news was painful. But will it be enough to fundamentally change and grow Wal-Mart’s business? Judging from the market’s reaction, investors don’t think so.

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Alexandra Biesada shops everyday, whether she wants to or not, and pines for the days when it was strictly a recreational activity. She has covered the retail beat for Hoover’s since 2001. Follow her on Twitter.

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