Wal-Mart cuts profit outlook again as customers dwindle

Wal-Mart Stores Inc. cut its annual profit outlook on Thursday as the world's largest retailer faced another quarter of sluggish sales and traffic declines.

Wal-Mart said it eked out a 0.6 percent increase in second-quarter profit and reported that a key revenue measure was flat in its U.S. discount business, after falling for five straight quarters. The company also reported its seventh straight quarter of traffic declines at its U.S. Wal-Mart stores.

The latest results show the continued challenges facing Wal-Mart's new management team. Doug McMillon, who was head of the company's international division, took over the company as CEO on Feb. 1.

Last month, he named Greg Foran, who was the CEO of Wal-Mart's China business as the head of Wal-Mart's U.S. discount business, which accounts for 60 percent of overall revenue. He replaced Bill Simon, who had held the position since 2010.

The Bentonville, Arkansas-based company is facing challenges from a slowly recovering economy and fierce competition from the likes of online king Amazon.com, dollar chains and grocers. It's also dealing with a shift among shoppers who are looking for more convenience by shopping in small stores or buying on their mobile devices and PCs.

Wal-Mart shoppers, who on average make $45,000 a year, were squeezed by the recession that began at the end of 2007 and have struggled to recover since it ended in 2009. While the job and housing markets are rebounding, Wal-Mart's low-income shoppers have not benefited from the improvements and continue to struggle to stretch their money between paychecks.

Analysts believe that competition will get even more intense heading into the final months of the year. Amazon.com is beefing up its services, like recently expanding its same-day delivery. Meanwhile, rival Target Corp. is stepping up its promotions as it aims to turn around its weak business after being stung by a major data breach.

A bigger Dollar Tree also could put more pressure on Wal-Mart. The dollar-store chain announced last month that it's buying rival Family Dollar for $8.5 billion, significantly broadening its reach.

In February, Wal-Mart announced that it will more than double its expansion plans for its Neighborhood Markets and Wal-Mart Express smaller stores that cater to shoppers looking for more convenience with fresh produce, meat and household and beauty products.

Wal-Mart has also vowed it will be move more quickly to bring e-commerce together with physical stores to better serve shoppers. That means testing same-day grocery delivery in several markets and rebuilding its e-commerce operation to further personalize the online shopping experience of each customer.

Wal-Mart has also been sharpening its focus on everyday low prices and bringing that strategy abroad.

The challenges played out in the company's financial results.

The company reported net income of $4.09 billion, or $1.26 per share, compared with $4.07 billion, or $1.24 per share, in the same quarter a year ago.

Earnings, adjusted to account for discontinued operations, were $1.21 per share. The average estimate of analysts surveyed by Zacks Investment Research was for earnings of $1.21 per share.

The company said revenue rose roughly 3 percent to $119.34 billion from $116.1 billion in the same quarter a year earlier. Analysts expected $119.06 billion, according to Zacks.

Wal-Mart said it now expects earnings per share for the year to be in the range of $4.90 to $5.15 per share. That's down from its previous guidance of $5.10 to $5.45 per share.

Wal-Mart has been struggling with falling sales and slowed growth for several fiscal quarters now. The Monitor reported on the challenges facing Wal-Mart's business model in the US last fall:

Consumer spending has tightened up, and the back-to-school sales season was a disappointment. Analysts are expecting that to continue, with the Christmas spending season forecast to be the weakest since 2009. Wal-Mart is the largest company in the world, and its performance is seen as a bellwether for the retail industry at large. “Wal-Mart represents about 11 percent of total US retail sales,” says Howard Davidowitz, a retail consultant based in New York, in a telephone interview. “They are America.”

But one part of it is decidedly a problem for Wal-Mart and mid- to low-priced department stores like it: The typical Wal-Mart customer has been squeezed the hardest by the sluggish recovery, and Wal-Mart may not be doing enough to accommodate the new economic reality. “If you look at this economy, it’s a train wreck for [the bottom] 80 percent of the American people, and Wal-Mart sells to that 80 percent,” Mr. Davidowitz says. And “77 percent of the new jobs created this year were part-time jobs. We have the lowest full-time labor participation rate in 35 years. Consumers’ incomes are not growing. One of six Americans are in poverty, and another one in six are an inch away from poverty.”

Outside financial pressures are playing a role as well. The expiration of the payroll tax cut in January left workers with less take-home pay than they were used to, and many Americans are having to delay some big steps like marriage and buying a home – which means less additional spending on items for that home. Couple that with $1 trillion in student loan debt – and money tied up in monthly payments for those loans – and it means less money for spending on smaller, discretionary items on which a big-box store like Wal-Mart depends.

“These middle- and lower-middle-class households, they have to be careful,” says Chris Christopher, the director of consumer economics for IHS Global Insight, based in Lexington, Mass. “A lot more households are living paycheck to paycheck. Median household income has dropped. And consumer confidence has been spurty, which means that the overall economy takes a bit of a hit.”

Wal-Mart Chief Financial Officer Charles Holley agreed with that assessment in August, calling shoppers “hesitant to spend what they have,” during the company’s second-quarter earnings call with reporters.

Instead, the higher end of the retail market is showing the most growth. The luxury market is booming, with high-end stores like Michael Kors and Tiffany boasting strong same store sales figures this year. Meanwhile, middle to lower-end department stores, like Wal-Mart and Target, have lagged. “The middle tier department stores and department stores overall haven’t been doing very well,” Mr. Christopher says. “The lower end and the upper end are doing better.”

What’s more, Davidowitz argues, Wal-Mart has lost out on its image as a low-price leader to stores like Family Dollar and Aldi, the discount supermarket chain. “These smaller operators are taking Wal-Mart’s business because all [those shoppers] care about is where to get the best deal,” he says, calling recent efforts to upscale the department store’s image and remodel store layouts “crazy.” If that core lower-middle-class Wal-Mart shopper thinks he can get a lower price elsewhere, he will, Davidowitz says.

Of course, Wal-Mart is a long way from disappearing. It’s the single-largest company, and private employer, in the world, with nearly $470 billion in annual revenue and $16.9 billion in profit generated last year, according to Forbes. A missed quarterly sales target just means sales weren’t as gargantuan as Wal-Mart expected them to be.  But if the economy continues to lag for most of Wal-Mart’s customer base, it lags for Wal-Mart as well.