Wal-Mart (NYSE:WMT), the world’s largest retailer, saw its shares get whacked 10% or more than 6 points Wednesday, the biggest drop ever. The mauling evaporated over $21 billion in market value. As a Dow member the drop shaved over 44 points off the average.
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Investors revolted after Chief Financial Officer Charles Holley lowered the boom at its annual investor day at the New York Stock Exchange (NYSE:ICE), disclosing that profits will decline between 6 and 12% in fiscal 2017. The consensus was for a drop of 4%. He also stated that 75% of the reduction was tied to higher wages.
You may recall, earlier this year, Wal-Mart led the charge in raising wages for about 500,000 workers. In April, workers started receiving $9 an hour and pay may get bumped to $10 next year. Over the next two years this will cost the company nearly $3 billion, according to Holley.
Boosting worker pay has been an initiative of CEO Doug McMillian, who said, “Our investments in our people, our stores and our digital capabilities and e-commerce business are the right ones.” Despite these optimistic remarks, just last month McMillian indicated that the company could be doing a better job of controlling costs, including wages, as covered by FOXBusiness.com.
That was a big clue. If you strip out higher wages, Wal-Mart has other issues. The stock is down 30% this year, which may be the worst performance since 1973 and a sign the investor community has lost confidence in the retailer. Comparable store-sales for Wal-Mart and Sam’s Club rose a modest 1.5% for the 13-week period ended July 31. Total net sales in fiscal 2016 are expected to fall flat.
Rival retailers such as Amazon (NASDAQ:AMZN) are offering shoppers more of the same items that Wal-Mart sells, like household goods and groceries, but with the ease of delivery. By comparison Amazon shares have gained 75% this year.
Aside from operational and competitive challenges, the strong dollar will cost the company $15 billion in revenue this year, according to remarks McMillian made to a rival news organization.
To ease the pain, Wal-Mart announced plans to buy back $20 billion worth of stock over the next two years. While buybacks can help prop up a share price, they are not a cure all for strategy and growth. As the dust settled Wednesday, the team at Deutsche Bank cut the price target on shares of Wal-Mart by 14% to $60 a share – exactly where the stock closed after the bell.