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Wal-Mart will spend more on e-commerce and online grocery

October 6, 2016 02:08 PM
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(Bloomberg)—Wal-Mart Stores Inc. is still in rebuilding mode.

While the world’s largest retailer has made improvements that spurred better-than-expected growth this year, CEO Doug McMillon says the company needs to spend more to build out its e-commerce capabilities and spruce up its stores. With those investments in mind, Wal-Mart, No. 4 in the Internet Retailer 2016 Top 500 Guide, said Thursday that net income in the year through January 2018 will be “relatively flat” compared with this year’s expected adjusted profit of $4.15 to $4.35 a share.

The outlook, which missed analysts’ estimates and sent the shares sliding, signals that Wal-Mart sees more work ahead as it attempts to compete with Amazon.com Inc. (No. 1 in the Top 500) and draw consumers to its supercenters. While Wal-Mart has generated better-than-expected growth in the U.S. in recent quarters, the company is pouring money into its website and mobile app, including with last month’s $3.3 billion acquisition of e-commerce startup Jet.com. Chief financial officer Brett Biggs said in an interview Thursday that Wal-Mart will continue to make investments in remodeling stores and ramping up its online grocery-ordering efforts.

“The management team deserves kudos for taking the company’s challenges head-on,” Scott Mushkin, an analyst at Wolfe Research, said in a note to clients earlier this week. “Stores are neater, better stocked, and prices are headed lower.”

Online ‘abyss’

Still, the company faces struggles online, where it has an “abyss of operating losses,” said Mushkin, who rates the stock underperform, the equivalent off a sell.

Shares of Bentonville, Ark.-based Wal-Mart fell as much as 3.9% to $68.89 in New York, the biggest intraday drop since May. The stock had gained 17% this year through Wednesday.

McMillon has attributed Wal-Mart’s profit struggles to his decision to pay higher wages and invest heavily in its online operations, but he told investors last year that growth would return once those the company moved past those increased costs. Wal-Mart is spending $1.5 billion this year to raise its minimum wages to $10 an hour and improve employee training. In addition to the Jet.com purchase, Wal-Mart also plans to invest more than $1 billion on its digital operations this year.

Slower expansion

China will become a greater focus for the company. Wal-Mart has struggled over the years to adapt its stores to meet Chinese consumers’ tastes and compete with local e-commerce and online grocery providers. Wal-Mart said Thursday that it’s boosting its stake in China’s JD.com Inc., No. 1 in the Internet Retailer 2016 China 500, strengthening an alliance to win more market share.

In the U.S., Wal-Mart will focus on improving its more than 5,200 U.S. locations and will significantly slow down the number of stores it is adding. The retailer will open just 35 of its supercenters next year, down from 60 additions in the current year. It will also add fewer of its smaller-format locations, such as its grocery-store-sized Neighborhood Markets, which have been a key driver of growth in recent years. Next year it plans to open 20 of the smaller stores, compared with 70 this year and 161 last year. Analysts have questioned how much further Wal-Mart can expand its big-box model, with more than 90% of Americans already living within 10 miles of a store.

Wal-Mart is signaling that its work may not be complete even after next year. The company said earnings per share in fiscal 2019 will grow about 5%. The retailer had previously projected a gain of 5-10%. “We are encouraged by the progress we’re seeing across our business, and we’re moving with speed to position the company to win the future of retail,” McMillon said. “Our customers want us to run great stores, provide a great e-commerce experience and find ways to save them money and time seamlessly—so that’s what we’re doing.”

 

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