What: Shares of retailer Wal-Mart (NYSE:WMT) sank by 10.1% during the month of August, according to S&P Capital IQ data, with a mixed earnings report and lowered full-year guidance driving the decline.
So what: Wal-Mart reported revenue of $120.2 billion during the second quarter, up 0.1% year over year and about $480 million higher than analysts were expecting. In the United States, comparable-store sales grew by 1.5%, with a 1.3% increase in traffic marking the third consecutive quarter of positive traffic. Wal-Mart's small-format Neighborhood Markets performed well, with comparable-store sales growing by 7.3%, while global e-commerce sales rose by 16% year over year on a constant-currency basis.
Unfortunately, this is where the good news ends. Sales in the international segment slumped by 9.6% year over year, driven by currency effects, and profitability declined across the board. Total operating income fell by 10% year over year, or 7.2% on a constant-currency basis, as costs rose faster than revenue. Operating income declined by 8.2% in the United States, 14.2% in international markets, and 13.4% at Sam's Club.
Along with reporting a decline in earnings, Wal-Mart lowered its guidance for the full year. While the company expects comparable-store sales to grow by 1%-2% in the United States, EPS is now expected to come in between $4.40 and $4.70, below the $4.99 that the company reported last year. This decline will be driven by higher labor costs, investments in e-commerce, and exchange rate issues.
Now what: It shouldn't be all that surprising that Wal-Mart's profits are falling. The company announced earlier this year a set of changes meant to benefit its employees, including a $9-per-hour starting wage, set to rise to $10 per hour at the beginning of next year. Wal-Mart expects higher wages and additional hours in stores to reduce earnings by about $0.24 per share during the full year.
This move is causing short-term pain, and investors punished the stock severely in August as a result, sending shares of Wal-Mart down to levels not seen since 2012. The hope is that these investments Wal-Mart is making in its workforce will eventually pay off, leading to sustainable earnings growth in the future. For now, though, investors don't like what they see.
Timothy Green has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.