Wal-Mart Stores (WMT) reported its second straight quarter of comparable sales growth in its $288 billion-a-year U.S. division for the holiday period, and managed to clock its first increase in shopper visits in more than two years. The progress shows Wal-Mart’s efforts to improve its selection of fresh food (grocery is 55% of company sales), its e-commerce firepower and adequate staffing of shelves are starting to show results.
But at the same time, Wal-Mart offered investors plenty to worry about (shares fell 3%, wiping $6 billion off its market value), with plenty of investments intended to improve business but that will lead to a lower profit in the fiscal year that just started. It also gave a tepid sales forecast. Much of the improvement in its U.S. performance had more to do with low gas prices and better weather than its retail prowess. Here is a rundown of some of the points of concern in Wal-Mart’s results report issued today.
1. E-commerce growth fell short of expectations
Wal-Mart has pumped billions into its e-commerce operations as it fights against Amazon.com (AMZN) and a resurgent Target (TGT) but that yielded an 18% increase in digital sales in the holiday quarter, which Wal-Mart CEO Doug McMillon called “solid, but not quite as strong as we wanted.” E-commerce sales are still only about 3% of sales. (Last year, the e-commerce growth had been 30%.) The world’s largest retailer blamed the shortfall on slumping electronics sales (Walmart was particularly aggressive during the holidays in slashing television prices) and a lack of video games for new consoles. The company said it plans to spend as much as 9 cents per share, or $290 million, on improving its e-commerce, to remedy that, even if it means smaller profit margins.
2. Gross profit margin was unchanged during the holiday season despite the sales increase
So shoppers spent more, visited more (shopper traffic rose 1.4% last quarter, the first increase in 9 quarters) and their mood improved—that yielded a sales increase but an unchanged gross profit margin. That can only mean Walmart cut prices (‘rollbacks’ in company parlance) during the holiday too aggressively, a strategy that was plain to see, what with the company starting Black Friday deals on Nov. 1 and being hard-core in its discounting all the way through the holiday season.
Walmart also spent a lot of money to staff more cash registers during the holiday period to address a long time complaint of many shoppers: end lines lines and wait times at checkout.
3. Comparable sales rose, but far more modestly than the competition’s
U.S. comparable sales, which include online sales and sales at stores open at least a year, rose 1.5%, better than the 0.7% rise analysts expected, and the second straight quarter of growth (after nearly two years of decline or stagnation). But the number could have been better. For one thing, gas prices hit multi-year lows, pumping an extra $5 billion in Americans’ pockets this holiday. For another, last year, Walmart U.S.’ sales had been hurt by cuts to the food stamp programs 20% of customers relied on, making the year-over-year comparison easier to beat for Walmart in 2014. Competitors from Target to J.C. Penney (JCP) to Kohl’s (KSS) all did better.
4. The wage increase and more training will help customer service, but at a cost
Wal-Mart made waves on Thursday when it announced raises for 500,000 U.S. associates to make sure they make at least $9 an hour and offering more training and adding back department managers, part of its efforts to offer “a better store experience,” according to McMillon. All that will dent profits this year to the tune of $1 billion. “Our bottom line will continue to be pressured primarily from the significant investments in associates,” McMillon said on a pre-recorded call to announced the quarterly results.
5. Some key international markets—i.e. China, Britain and Brazil—still tough
Wal-Mart was the latest U.S. company to warn investors that the strong greenback was hurting sales—in this case, the damage is to the tune of $5 billion. But beyond the currency crunch, Wal-Mart is getting hit in myriad ways in different key countries. In Britain, it was taken by surprise by how much U.K. rivals took to Black Friday, until this year a purely American shopping event. In China, it continued to struggle with shoppers’ perceptions that its prices were not low enough or its food fresh enough. (In Canada, its comparable sales rose, and with Target almost gone from the market, it should see more growth.)
On the whole the company forecast a profit of $4.70 to $5.05 per share this year, the midpoint of which is below the $4.99 Wal-Mart reported for 2014. And it expects U.S. comparable sales (Walmart US is 60% of its business) to rise 1-2% this quarter.
All this shows just how much work is still ahead for Wal-Mart.