Wal-Mart shares tumble as profit forecast to drop

Wal-Mart's stock tumbled on the Wall Street following the forecast of earnings drop in the range of 6-12 percent hammered down the market sentiment. Wal-Mart shares fell 10.04 percent or $6.70 to $60.03 indicating biggest fall in a day during the past three decades. The stock was already trading 22 percent lower before the latest drop. Gearing up to compete with Amazon, Wal-Mart Stores Inc hiked investment in internet technology and raised wages. The earnings are expected to be flat for the current fiscal year and one or two percent lower than the previous forecast. The third quarter results from Wal-Mart are scheduled on 17 November.

Wal-Mart fiscal year begins in February and investors were anticipating higher earnings for the fiscal year 2017. But, the negative forecast came as a jolt to the investors. Amazon has surpassed Wal-Mart as the world's largest retailer.

Wal-Mart suffered billions of dollars erosion in market value following the lower forecast in earnings pulling the Dow Jones Industrial Average down 157 points or one percent drop.

Wal-Mart has been infusing funds into the operations and e-Commerce capability to push sales volume. The investment is likely to continue till 2017. Wal-Mart has also raised wages to $9 per hour in April and will further hike it to $10 in 2016. The pay rise, training and enhancing capability have increased costs by $1bn for the company and the additional cost burden is expected to be $1.5bn in 2016.

Wal-Mart board has approved $20-bn buyback to be implemented over next two years. This is in addition to the previous $15-bn repurchase program commenced in 2013. Doug McMillon, Chief Executive Officer, Wal-Mart, said that retail was reviewing its portfolio for streamlining the business operations. The share buyback could be a sign for the moderate sales growth and margin contraction.

The sales growth for next three years will be in the range of 3-4 percent and this is likely to add about $45-60bn in revenues, according to Charles Holley, Executive Vice-President, Wal-Mart. The earnings for the current fiscal years are expected to be flat and this is 1-2 percent lower than the previous forecast.

The fiscal year of 2017 is likely to be heavy investment period for Wal-Mart. The second phase of investments in wages and training will impact operating income by $1.5bn. Wal-Mart is expecting earnings per share (EPS) to increase by 5-10 percent for the year.

Retail analysts wonder whether Wal-Mart can sustain the revised forecasts despite its heavy investment in internet technology and raising salaries. What will be profitability of Wal-Mart, if its revenues don't grow at four percent?