(Reuters) - Wal-Mart Stores Inc warned on Wednesday that higher wages as well as spending on e-commerce and lower prices would cut earnings per share as much as 12 percent next fiscal year, sparking the steepest one-day decline in the company’s shares in 25 years.
Wal-Mart faces tough competition on multiple fronts, from the relentless expansion of online leader Amazon.com Inc to dollar stores and supermarkets fighting for a piece of its grocery business. Its international operations are also under pressure with a stronger dollar eating into sales.
Wal-Mart Chief Executive Doug McMillon said a $1.5 billion investment in wages and training, including raising the minimum store wage to $10 an hour from $9, were needed to improve customer service and would account for three-quarters of the expected 6 percent to 12 percent drop in earnings per share next year.
Wal-Mart also announced a $20 billion share buyback but the drop in its share price wiped out close to the same amount in market value, and the 10 percent drop was the worst one-day percentage performance since January 1988.
The decline in Wal-Mart shares pulled down the Dow Jones Industrial Average, accounting for a quarter of the 1 percent drop in the index.
The world’s largest retailer by revenue said it would invest several billion dollars to lower prices over the next three years. That sparked worries of a price war, and shares of rivals including Target and Home Depot also fell.
“We can deliver stronger financial performance in the short-term simply by running our core business better but that won’t be enough,” Chief Executive Doug McMillon said at an investor meeting in New York.
The company forecast earnings per share would grow 5-10 percent in the fiscal year ending in January 2019.
Wal-Mart Stores said current fiscal full-year sales would be flat due to the stronger-than-anticipated impact of the dollar. It had previously forecast net sales growth of 1-2 percent for the current fiscal year ending January.
“The guidance is very disappointing,” Edward Jones analyst Brian Yarbrough said. “What if these investments don’t lead to better sales. That’s the biggest question.”
Wal-Mart is spending $1.5 billion in higher wages and training next year. Greg Foran, head of the U.S. business, said Wal-Mart would add 3,500 managers in the United States to improve its curbside grocery pickup service.
Wal-Mart also said it was adding curbside pickup for groceries ordered online to 10 new markets, including Dallas, Miami and Tulsa, bringing the total to 23. It will add another 20 markets early next year, expanding a service it believes capitalizes on its network of stores - something Amazon does not have - and will be a key driver of growth.
The company is building out a network of warehouses to handle e-commerce, a costly move Wal-Mart sees as essential to stopping Amazon and other rivals from stealing its best customers.
At the same time Wal-Mart projected slower growth in new stores, with 85-95 of the smaller Neighborhood Markets format planned for the fiscal year ending in January 2017, down from 160-170 planned for the current fiscal year. Supercenter openings would slow to 50-60 in fiscal 2017 from 60-70 this year.
Price competition was one reason for the slower growth. Foran said that Wal-Mart could not compete with local grocers in some markets, a factor that has played into its scaled back expansion plans for smaller stores.
“To be completely candid, when we are up against someone who is really good at supermarkets, frankly our fresh offering has not been on par with what it takes to win in those environments,” Foran said.
It also is trying to spruce up neglected stores. Foran said that the percentage of stores which got a “pass” grade for cleanliness, speed and friendliness had risen to 67 percent from 17 percent at the beginning of the year.
“That is really only getting us to at best mediocrity. So that bar is now being moved up so that a whole bunch of stores that were green are now going to find themselves red but they’ve all been told that,” he said.
Wal-Mart has been grappling with sluggish sales, leading investors to seek significant changes. Wal-Mart is controlled by the Walton family, whose wealth has taken a dramatic hit this year as shares have slid about 30 percent.
The company announced a new chief financial officer and appointed a chief merchant last week.
Wal-Mart’s promise to spend billions keeping prices low, coming after attempts to wring more savings from its suppliers, raised concerns for other retailers as well.
“Investors are anticipating a price war, and I agree with that assessment,” Kurt Jetta, CEO of retail analytics firm TABS, said by email. “These price wars never work for anyone. In fact, they weren’t working for Walmart even when they had an advantage over Target.”
Shares of Home Depot fell 1.1 percent, and Target dropped 3.5 percent.
Wal-Mart’s shares closed down 10 percent at $60.03.
Reporting by Sruthi Ramakrishnan in Bengaluru and Nathan Layne in Chicago; additional reporting by David Gaffen; Editing by Anil D'Silva, Ted Kerr and Bernard Orr