Wal-Mart gives tepid outlook as grocery competition mounts

A Wal-Mart store in Oakland, California. The retailer's downbeat forecast illustrates the high cost of its push to catch up to Amazon online.
A Wal-Mart store in Oakland, California. The retailer's downbeat forecast illustrates the high cost of its push to catch up to Amazon online. PHOTO: AFP/GETTY IMAGES

WASHINGTON (BLOOMBERG) - Wal-Mart Stores, racing to fend off Amazon.com Inc and a fresh attack from European grocery discounters, gave a lukewarm earnings forecast for the third quarter, a sign that heavy spending aimed at maintaining its edge is taking a toll.

The shares slid in early trading Thursday (Aug 17) after the retail giant said that profit will be 90 US cents to 98 US cents a share in the period. Analysts had projected a number at the top of that range.

The outlook tempered enthusiasm after Wal-Mart posted its best grocery sales growth in five years last second quarter, helped by the end of a record-setting bout of food deflation. The grocery business accounts for more than half of Wal-Mart's revenue, but it is under attack like never before. Most notably, Amazon is acquiring organic-food purveyor Whole Foods Market in a bid to become a national grocery powerhouse.

"We have to take things that are working and lean into them," Wal-Mart chief financial officer Brett Biggs said in an interview.

The shares declined as much as 2.4 per cent to US$79.03  in pre-market trading after the results were posted. Wal-Mart had been up 17 per cent this year through Wednesday's close.

The downbeat forecast illustrates the high cost of Wal-Mart's push to catch up to Amazon online. Chief executive officer Doug McMillon has channeled more than one-third of the company's capital spending budget into digital initiatives - like specialised e-commerce distribution centres - up from just 20 per cent a few years ago.

Profit margins on online sales are narrower than those for in-store sales, due to the costs of fulfilment. Wal-Mart's operating margins declined in the quarter, according to Moody's Corp  analyst Charlie O'Shea.

US same-store sales rose 1.8 per cent in the second quarter, matching the gain projected by analysts. Excluding some items, earnings amounted to US$1.08 a share in the period, which ended on July 31. Analysts estimated US$1.07. The company raised the lower end of its full-year earnings guidance to US$4.30 a share, with the upper end remaining at US$4.40.

The question now is whether Wal-Mart can battle Amazon while also keeping Aldi and Lidl at bay. The German no-frills chains are expanding into the US, targeting the same lower-income shoppers that Wal-Mart depends on most.

Though costly, Wal-Mart's investments in e-commerce are helping to boost its top line. The US online division saw gross merchandise volume - a measure of all the goods it sells - increase 67 per cent in the second quarter. Total revenue climbed 2.1 per cent to US$123.4 billion (S$168.4 billion).

Wal-Mart also is facing a renewed threat from long-time bricks-and-mortar rival Target Corp. That company boosted its annual forecast earlier this week after improving both its online sales and customer traffic. CEO Brian Cornell aims to refurbish stores, open more small locations in cities and speed the delivery of online orders.

Heavy discounting should continue this quarter, "as Wal-Mart and Amazon continue their battle over market share", Mr O'Shea said in a note.

"As Wal-Mart is a key player across most back-to-school/back-to-college product categories," he said, "we would expect further promotional activity."