Wal-Mart released earnings yesterday, reporting a $0.04 EPS miss from their estimated EPS of $1.12 , but CNBC tells investors not to give up on Wal-Mart in the long term because of performance in the short term. As the mega retailer incurs new costs, they plan to go back to their old ways of savings.
Wal-Mart raised its minimum wage to $9 this year, and plans to pay most employees at least $10 per hour by 2016. The company reported that the 2015 wage hike will decrease EPS by 24 cents. They also blamed investments in web operations for an additional 6-9 cent decrease in EPS, but investment in e-commerce is necessary for businesses today. Furthermore, Wal-Mart needs to learn to deal with shrinkage due to their increasing food offerings. The highly perishable products give executives new challenges to their streamlined supply chain. Shrinkage is expected to cost the company $0.11 per share this year.
Wal-Mart, however, will definitely rebound as they have always been ahead of the game when it comes to minimizing costs. They plan to go back to their traditional ways of squeezing suppliers for lower prices and shorter lead times, as they have strayed from actively practicing these negotiations recently. With regards to shrinkage, CNBC found that “Wal-Mart is already working to combat shrink-related losses by cracking down on theft and reducing the price of items nearing their expiration date.” Wal-Mart expects these sales and increased attention to theft to save them about $500 million per year.
Another new venture for Wal-Mart is their smaller stores that aim to take business away from smaller competitors when consumers just need to make a quick midweek trip for a few items. CNBC reported that “The outperformance of its small-format Neighborhood Market stores has likewise continued, with comparable sales at these locations rising 7.3 percent during the quarter.” These smaller scale stores will attract more business from loyal Wal-Mart customers who do not want to deal with the giant warehouse style layout if they only need to quickly pick up milk or soap on their way home from work.
Another way Wal-Mart aims to attract more business is to keep more registers open during peak hours and continue to enhance their already enviable supply chain and stocking system. Wal-Mart attributes their 1.3% increase in traffic during the second quarter to these customer-focused initiatives.
With operating income declining in 6 of the last 7 quarters, CFA Budd Bugatch tells CNBC that patience is key for this long-term investment and suggests that this low point is good time to buy. The stock will undoubtedly rally as the company learns to how to handle costs associated with new endeavors. As Wal-Mart continues to invest in the future and with back-to-school sales right around the corner, Bugatch recalls that Sam Walton used to say earnings will follow as sales rise and executives learn to handle costs. This sage advice from the founder of the retail giant is as good today as it was when the company began.