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Saving Wal-Mart is proving to be very costly

The Street logo The Street 8/18/2015 Brian Sozzi
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Mighty Wal-Mart is in a transition period, one where long-neglected investments in its people and operations is crimping profits.

On Tuesday, investors received another dose of reality of how change is proving costly. Wal-Mart reported second-quarter earnings per share of $1.08, falling short of estimates for $1.12. The result was near the bottom end of the world's largest retailer's guidance of $1.06 to $1.18 a share. Full-year earnings are now seen in a range of $4.40 to $4.70 a share, down from the $4.70 to $5.05 a share Wal-Mart previously forecast.

"Winning in the future requires change -- change, in this case, requires investment, and investment pressures short-term earnings," said Wal-Mart CEO Doug McMillon in a statement. Some of the changes at Wal-Mart have centered around improving relations with employees.

© Rick Wilking/Reuters  
Wal-Mart raised pay for approximately 500,000 full-time and part-time associates at U.S. locations and Sam's Clubs in the first half of the year. The move lifted the minimum hourly wage at Wal-Mart to $9 an hour. By Feb. 1, 2016, another hike will ensure current Wal-Mart associates will earn at least $10 per hour.

Other efforts that are under way include bringing back department managers to bolster customer service, re-training workers on the basics of retailing, and piloting a new employee scheduling program to better accommodate workers' lives.

Wal-Mart may at least be seeing some benefit to its sales from its employee-related investments. Wal-Mart's U.S. same-store sales rose 1.5% in the second quarter, quicker than the 1.1% gain logged in the first quarter. And customer traffic rose a solid 1.3%, aided in part by the decline in gas prices.

"Wal-Mart is trying to turn around by spending more because they have underspent for years," said TheStreet's Jim Cramer. "I was impressed that they had more traffic but the fact is that they have been terrible at estimating how they are doing and that means they do not have a handle yet on how to fix things. They have so many weaknesses whether it be food where they don't have the right natural and organic to housewares where they look out of date to on-line where they are making gains, but still have the wrong merchandise. Plus they have underpaid their people for ages. Now that's changing."

The host of initiatives continue to eat up Wal-Mart's precious profits. Wal-Mart now sees its various investments weighing on earnings by 24 cents a share this year, up from a prior forecast of 20 cents a share. Operating profits at Wal-Mart U.S. declined 8.2% year over year, a faster drop than the 6.8% decline notched in the first quarter.

"Our bottom line came in substantially below what was planned," said Wal-Mart U.S. President and CEO Greg Foran. In addition to the higher labor costs, Foran pointed to two factors contributing to the disappointing profits for Wal-Mart U.S. -- a shift to lower pharmacy reimbursements as more people are being covered under Obamacare, and increased inventory shrinkage. Shrinkage is the unexplained disappearance of inventory, primarily due to theft, although Wal-Mart declined to provide any additional details.

"I want to be straightforward: These issues will present continuing profit challenges for the remainder of the year, we are certainly disappointed," said Foran.

The profit challenges have caused one other big change at the hard charging Wal-Mart: A pullback in planned new-store openings. Wal-Mart now expects to open a total of 160 to 170 of its smaller format Neighborhood Market stores this year, down from a previous forecast of between 180 and 200. Wal-Mart said it's still on track to build approximately 60 to 70 Supercenters this year.

"Amid the [profit] pressures, we are thoughtfully evaluating every decision and use of company resources as we go through the back half of the year," said Foran.

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