On Tuesday, May 19, Wal-Mart Stores Inc. (NYSE/WMT) released its earnings report for the quarter ended April 30, 2015. Its earnings per share (EPS) are $1.03, lower than the expected $1.04. Quarterly revenue is reported at $114.82 billion, lower than last year’s $114.96 billion. (Source: Wal-Mart, May 19, 2015.)
Upon the news, Wal-Mart’s stock price dropped more than 2.1% to $78.20 in pre-market trading.
Wal-Mart’s Earnings Hurt by Strong Dollar
In its first-quarter financial report for fiscal 2016, the retail giant states that EPS was negatively impacted by currency by about $0.03. Indeed, revenue generated from overseas stores will translate to smaller numbers under a strong U.S. dollar rather than a weak one.
However, a stronger dollar is not always negative for Wal-Mart. When the dollar appreciates against, say, the Chinese yuan, it will be cheaper for Wal-Mart to buy supplies from China. This means the cost of sales will be cheaper for certain products.
Consumers Not Spending, Increased Wages
When gas prices fall, you’d expect people would have more discretionary money to spend at stores like Wal-Mart. But that simply isn’t happening. On Wal-Mart’s earnings call, Doug McMillon, president and CEO, said that “many of our U.S. customers are using their tax refunds and the extra money from lower gas prices to pay down debt or put it into savings.” Mind you, this phenomenon may haunt other retailers as well. (Source: Wal-Mart, May 19, 2015.)
Increased wages could also stir up headwinds against Wal-Mart’s earnings. In April, the company raised the minimum starting wage in U.S. stores to $9.00 per hour (the current federal minimum wage is $7.25 per hour). This is part of Wal-Mart’s $1.0-billion investment in its associates. These investments will include raising pay bands, restructuring management teams, and training programs. Keep in mind, the investments will drive up the cost initially, but the hope is that they will pay off over time.
Another Major Problem for Wal-Mart: Tough Competition Ahead
Wal-Mart is facing increased competition. Its rivals include not only physical stores such as Target Corp. (NYSE/TGT) and Costco Wholesale Corporation (NASDAQ/COST), but also the online retail giant Amazon.com Inc. (NASDAQ/AMZN).
Earlier this month, Wal-Mart announced its launch of a pilot program that offers unlimited free shipping to its subscribers. The yearly subscription fee is $50.00, which is about half of what Amazon.com charges for its subscription shipping service, “Amazon Prime.”
Looking forward, Wal-Mart’s expectation for second-quarter EPS is between $1.06 and $1.18, which, for the most part, is below analyst estimates of $1.17.
The future of the company will partly depend on how well the investment in its associates translates into better customer service and more efficient operations, and how well the pilot project can help the company capture market share in the e-commerce business. The health of the U.S. and global economies also matters for Wal-Mart’s prospects. If consumers are not spending money, it will be hard for retailers to make money.
Don’t forget; the rising dollar will remain an issue for Wal-Mart as well. It has a strong foothold in areas across the globe, but a rising greenback will become an obstacle in Wal-Mart’s international growth.