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Walmart's investment year will hold back profit growth; shares slide

Stock MarketsFeb 18, 2021 10:51AM ET
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2/2 © Reuters. Walmart administers COVID-19 vaccines as part of Federal Retail Pharmacy Program in West Haven 2/2

By Aishwarya Venugopal and Richa Naidu

(Reuters) - Walmart (NYSE:WMT) Inc expects full-year sales and profit growth to slow as it reinvests in its business, after revenue soared to $560 billion last year as people stocked up on groceries during the pandemic.

The world's biggest retailer, which employs 1.5 million people in the United States, also said it is raising wages to more than $15 per hour on average. About half of Walmart's hourly U.S. workers will earn $15 an hour or more, though there are some roles that will still start at $11 an hour, the company said.

Shares in Bentonville, Arkansas-based Walmart were down 5.6% on Thursday. The company has invested heavily in online, advertising and healthcare businesses over the past year, using pandemic-led sales momentum to diversify beyond brick-and-mortar retail.

"Guidance was muted, locking in gains from last year but stalling profit expansion in favor of critical investments in people and platform," Jefferies (NYSE:JEF) analyst Stephanie Wissink said.

Walmart forecast adjusted net sales to grow in the low single digits in fiscal 2022 which ends Jan. 31, much lower than the 8.5% growth seen in the preceding year. It also expects earnings per share to be flat-to-slightly up, below the 2.2% growth analysts had been expecting, according to Refinitiv.

"We're going to invest more aggressively in capacity and automation to position ourselves to earn the primary destination with customers, we are absolutely playing offence here," Chief Executive Doug McMillon said at Walmart's investor day conference.

Walmart expects capital expenditure to increase 27% to about $14 billion this year, focusing on key areas like supply chain and automation.

WAGE HIKE, STIMULUS BOOST

Walmart's announcement to increase wages comes at a time when pressure to increase the federal minimum wage has gathered fresh momentum. President Biden has made the issue a priority and reiterated his support for a base wage hike. He is also pushing to get $15 minimum wage added to his COVID rescue package.

"People who we are raising wages for tend to have been with us for a longer period of time than someone who might be earning the entry wage," McMillon said. "We will raise our starting wage rate over time."

Driven by an early holiday season and government stimulus checks, fourth-quarter sales at Walmart's U.S. stores open at least a year surged 8.6%, excluding fuel, well above analysts' expectations for a 5.6% rise.

The retail industry is expecting another wave of stimulus-driven consumer spending in coming months as the U.S. Congress considers the Biden administration’s recovery plan that includes sending a $1,400 check to households.

“The guidance that we're going to give this morning really doesn't include any material stimulus because we just don't know what will happen. If we get more stimulus certainly that's a tailwind for us," Chief Financial Officer Brett Biggs told Reuters in an interview.

Walmart missed expectations for fourth-quarter profit as it took on about $1.1 billion in pandemic-related costs during the quarter, including higher wages for warehouse workers, bonuses for store employees and costs related to keeping its stores clean.

Online sales rose 69% in the quarter, blowing past a 35% increase in the year-earlier period, but slower than a 79% surge in the third quarter.

The retailer has relied on its scale and strengthening online presence during the pandemic to attract new customers looking for a one-stop shop for their daily needs.

Operating income rose 3.1% to $5.49 billion in the quarter, while adjusted earnings were $1.39 per share. Analysts on average were expecting the company to earn $1.51 per share.

Walmart's investment year will hold back profit growth; shares slide
 

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Comments (2)
Alan Greber
Alan Greber Feb 18, 2021 11:25AM ET
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the government should not be deciding wage levels!!!! well on our way to Socialism!!!
peter neal
peter neal Feb 18, 2021 8:48AM ET
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Higher mandated costs per Government equal lower sales higher prices and inflation. Not a good time to be a Business.
Goldern Taintnone
nowtemporary Feb 18, 2021 8:48AM ET
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Poor people getting paid equals more discretionary spending.. at Walmart. Great time to be a business.
 
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