By Lauren Coleman-Lochner
and Renee Dudley
Doug McMillon’s first days as chief executive officer of Wal-Mart Stores Inc., the world’s largest retailer, promised to be busy.
The 47-year-old head of the company’s international division, who replaced Mike Duke as of Feb. 1, has to help the U.S. unit cope with government benefit cuts for the poor that are turning out to hurt sales, not help them as the company’s executives had expected. He’ll also need to grapple with higher-than-projected costs in Brazil, the continuing threat from online retailers and a lackluster retail environment.
Some of those obstacles will drag fourth-quarter profit to the low end or even under its forecast for the period, Walmart has said. They also threaten to harm the company in the future if not addressed, said Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis.
“It’s difficult out there for that low-end consumer, and that is such a big part of Walmart’s business,” Yarbrough said. “Maybe they could make some merchandising changes. Maybe they could get more aggressive on prices. That low-income customer continues to be crunched.”
Same-store sales at U.S. stores and the Sam’s Club warehouse division will be less than projected, the Bentonville, Ark.-based company said. Walmart said in November that profit per share in its most recent quarter would be $1.60 to $1.70. Analysts estimated $1.65, on average.
Walmart stock rose 15 percent last year, trailing the 30 percent gain for the Standard & Poor’s 500 Index.
Walmart’s financial announcement follows forecast cuts at several U.S. retailers because of a holiday season marked by profit-eating discounts to lure traffic. Unlike department stores and electronics chains, Walmart is taking a hit after U.S. lawmakers allowed a temporary increase in food-stamp benefits that was passed as part of the 2009 economic stimulus package to expire Nov. 1.
Walmart U.S. CEO Bill Simon said in October that the reduction may actually help the retailer.
“Price will become more important,” Simon said at a meeting with analysts. “And when price is more important, we’re more relevant.”
The retailer’s international business faces challenges as well.
The company, which closed 50 stores in Brazil and China, said non-income tax items in the South American nation will reduce profit in the quarter by 6 cents a share and that employment claims there will cut profit by 5 cents. Walmart has been struggling to grow in Brazil as it works to reintroduce its everyday low price strategy there.
A change in the way Walmart accounts for leases in China will reduce profit by 3 cents a share.
“The international business has not been performing where they hoped or where investors hoped,” said Scott Mushkin, an analyst at Wolfe Research Securities in New York.
He has the equivalent of a hold rating on the shares.
Walmart recently said it would eliminate 2,500 employees such as assistant managers and phone attendants at Sam’s Club in order to streamline management.
That program will trim 1 cent a share from fourth-quarter profit.
The company plans to report full fourth-quarter results on Feb. 20.