Chicago Sun-Times

Wal-Mart shares tank on lower earnings for-cast .....................

Retail giant surprises investors, analysts; stock plummets 10%

- Kevin McCoy @kmccoynyc USA TODAY

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.

 ?? ERIK S. LESSER, EUROPEAN
PRESSPHOTO AGENCY ?? Walmart had been expected to announce higher earnings for the fiscal year that starts in February.
ERIK S. LESSER, EUROPEAN PRESSPHOTO AGENCY Walmart had been expected to announce higher earnings for the fiscal year that starts in February.
 ??  ??
 ?? PATRICK T. FALLON, BLOOMBERG ?? Walmart also cited costs associated with investment­s in higher wages and increased training.
PATRICK T. FALLON, BLOOMBERG Walmart also cited costs associated with investment­s in higher wages and increased training.

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