Wal-Mart shares tank on lower earnings for-cast .....................
Retail giant surprises investors, analysts; stock plummets 10%
Walmart shares plunged to their lowest one-day drop in at least two decades Wednesday after the U.S. retailing giant jolted financial markets by forecasting a 6% to 12% earnings drop in fiscal year 2017.
Shares of the Bentonville, Ark., company dropped 10%, or $6.70, to close at $60.03 on the startling news Walmart executives delivered at the company’s annual investors conference with Wall Street analysts.
Attendees had expected Walmart to forecast higher earnings for the fiscal year that starts in February, even as the company hikes spending on Internet technology and employee salaries and battles Amazon — the e-commerce rival that this year leapfrogged Walmart for the title of the world’s largest retailer.
Instead, they heard a bleak outlook that erased billions of dollars of Walmart shareholders’ value and dragged down the Dow Jones Industrial Average 157 points, a nearly 1% drop.
Charles Holley, Walmart’s chief financial officer, estimated sales growth during the next three years would range between 3% to 4% annually, adding approximately $45 billion to $60 billion in revenue. Along with that relatively moderate forecast, Walmart said earnings for sales growth for the current fiscal year would be flat, a drop from the 1% to 2% increase forecast earlier.
Holley issued an even more dramatic long-range earnings outlook, citing impact of approximately $1.5 billion from the second phase of Walmart’s previously announced investments in higher employee wages and increased training.
“As a result of these investments, we expect earnings per share to decline between 6% and 12% in fiscal year 2017, however by fiscal year 2019 we would expect earnings per share to increase by approximately 5% to 10% compared to the prior year,”
Holley said.
The warning compounded a secondquarter miss of Wall Street expectations in August, when the company cut its financial outlook amid lower earnings. Walmart is scheduled to report thirdquarter results on Nov. 17.
“It was pretty disappointing, across the board,” Brian Yarbrough, a consumer analyst at Edward Jones, said of the bombshell. He questioned whether Walmart would meet even the reduced profit target as it spends billions of dollars on building its Internet technology platform and hiking employee salaries.
“They’re making all these investments, but what happens if revenue doesn’t come in at 3% or 4%?” asked Yarbrough, whose firm maintained its hold recommendation on Walmart shares.
Morningstar expects to cut its $79 fair market value estimate for Walmart shares by approximately 5% in the wake of the company’s lowered outlook, equity analyst Ken Perkins wrote in a note to investors Wednesday.
However, saying the shares are trading around 13-14 times fiscal 2017 earnings, he characterized the market plunge as “an overreaction and a buying opportunity.”
“The sell-off and market price of Walmart’s shares imply that Walmart’s recent investments in e-commerce and wages will be unsuccessful in driving profits long-term. We see this scenario as a possibility, but we believe that the market underestimates wide-moat Wal-Mart’s cost advantage and its ability to compete,” Perkins wrote.
Similarly, Walmart CEO Doug McMillon emphasized an investments-are-paying-off-but-will-take-time mantra in his remarks.
“For us to deliver for shareholders, we have to first, win with customers and win with associates, and that’s what we’re choosing to do,” McMillon said.
Walmart tried to temper the bad news by announcing a $20 billion share buyback program over the next two years. The company said it had retired the $8.6 billion remaining on its 2013 repurchase authorization.