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Wal-Mart Loses Billion for Initiatives

walmart stock crash
Posted: October 14, 2015 at 10:39 pm   /   by   /   comments (0)

Wal-Mart, regarded as the largest retailer of the world, saw its shares drop by 10% or by more than 6 points Wednesday, which is their biggest drop in history. This surprising drop in shares eliminated more than $21 billion of their market value; thereby shaving off about 44 points on average.

Investors were dismayed as Charles Holley, Wal-Mart’s Chief Financial Officer, disclosed during the annual investor day at New York Stock Exchange that the profits will be declining by about 6 to 12 percent in the fiscal year of 2017. They agreed to drop by 4 percent for which he also stated that there will be a 75% reduction due to higher wages.

As you may have remembered, Wal-Mart has led the campaign on raising wages for approximately 500,000 employees earlier this year. In April, their employees started to receive $9 per hour and their pay will increase to about $10 per hour in 2016. This is actually one of the reasons why the company is experiencing a fall in profits in relation to their expenses on their e-commerce initiative. Last year, Wal-Mart has invested their money in creating a website and opening up more depots that would speed up their online deliveries.

Wal-Mart could spend approximately $1.1 billion in additional expenses for their digital initiatives ad they move forward. “[The outlook was] far worse than anyone expected,” said Charles Grom, an analyst from Sterne Agee & Leache.

According to CFO Holley, this will cost the company about $3 billion in the next 2 years.

Doug McMillian, the company’s CEO, who led the initiative of boosting worker’s wages, said, “Our investments in our people, our stores, and our digital capabilities and e-commerce business are the right ones.”

Despite their positivity, McMillian had indicated last month that the company could do a better job in managing and controlling their costs, including wages.

walmart stock crash

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Analysts say that if you are to strip out higher wages, Wal-Mart actually has other issues. Their stock is down 30% this year alone, which is their worst performance by far since 1973; it may be a sign that the stock investors had lost confidence in the company.

If you compare store sales of Wal-Mart and Sam’s Club, it has risen a decent 1.5% for a period of 13 weeks that ended in July. Total net sales are expected to fall in fiscal 2016.

Wal-Mart’s rival retailers are now offering their shoppers similar items that they are selling, such as household goods and groceries, with the convenience of door-to-door deliveries. Amazon, one of their rivals, in fact has gained about 75% this year.

The Chief Investment Officer of Tigress Financial Partners, Ivan Feinseith, said that Wal-Mart has already been earning $500 billion in revenue and it is ready to expand further. Although the Walton family has lost about $9 billion due to stock crash, Warren Buffett’s Berkshire Hathaway that has a 2.1% share in the company had lost about $453.6 million. But, chief executive Greg Foran, reassured their investors saying, “We are on the right path, and we know what we need to do.”