2015 has been an ugly year for Wal-Mart Stores (WMT +0.58%). The stock saw its greatest single-day drop in October when management slashed guidance, and the world's biggest retailer has been facing headwinds from multiple angles. The growth of e-commerce wizard Amazon.com has chipped away at Wal-Mart's low-price advantage. Poor customer satisfaction reports have forced the company to raise wages, cutting into profits, and a stronger dollar has weighed on its international business. Over the course of the year, the stock has lost about a third from its peak in January, falling steadily the whole way.
While any number of divisions at the retail giant can be fingered for the blame, it's the U.S. segment that deserves the title for worst-performing. Wal-Mart divides its business into three segments -- U.S., International, and Sam's Club. Wal-Mart's U.S. stores make up the majority of revenue and profits, and were the only division to see operating income fall in all three quarters this year. Operating income in that division is down 7.9% as it's invested in higher wages, training, and e-commerce in order to improve store performance.
All that labor ain't cheap
With 2.2 million employees worldwide, Wal-Mart has more people working for it than any other organization in the world after the Department of Defense and the Chinese Army. This year, CEO Doug McMillon undertook the challenge of revamping the organizational chart in order to provide better customer service. Not only did he raise the base wage to $9/hour, promising to lift in again in February to $10/hour, but he rearranged departments and staffing.
Source: Walmart.com
The retailer eliminated the zone manager position, redeploying those 4,500 workers elsewhere, a move it said would cut bureaucracy, improve customer service, and give front-line workers more input. At the same time, the company gave raises to department managers and more training for employees.
Wal-Mart is expected to spend up to $2.7 billion over this year and next on increased wages and training, a huge sum to give up on the bottom line. With an operating margin in the segment of about 6%, Wal-Mart will have to boost sales by about $42 billion, which would mean growing its U.S. revenue by 14%.
That is going to take several years, and Wal-Mart's CFO Charles Holley acknowledged in the company's guidance cut announcement that profits are not expected to move substantially upwards until 2019. There are signs that the company is moving in the right direction, though. Comparable sales are improving after years of negative or flat growth, reaching 1.5% in the second and third quarter of this year. E-commerce has also been a source of growth, climbing 17% in the first half the year, though it slowed to 10% in the third quarter due to challenges in international markets.
Finally, its Neighborhood Market format has consistently delivered comparable sales growth in the high single digits, though management is slowing the pace of new openings as the company retrenches and focuses on e-commerce.
Looking ahead, Wal-Mart has already delivered its bad news. Earnings per share are expected to dip 6-12% next year, but the market has already accounted for that, meaning Wal-Mart has given itself a low bar to overcome.
The company's performance will get worse before it gets better, but it appears to be moving in the right direction, with comparable sales improving and customers noticing the store improvements. 2016 will be another tough year, but CEO Doug McMillon appears to be guiding the company to a better future.
