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Why Shares of Wal-Mart Stores Inc. Slumped 10% in August

By Timothy Green - Sep 2, 2015 at 8:00AM

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The retailer expects earnings to take a hit this year due to higher labor costs, and investors aren't happy.

What: Shares of retailer Wal-Mart (WMT 0.11%) 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.

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