Wal-Mart profit falls on pay raises

NEW YORK - Wal-Mart Stores Inc. reported a 7 percent drop in first-quarter profit as the strong dollar and some efforts to improve its business hurt its bottom line.

The company said Tuesday that higher worker wages and increased spending on its online operations were among the reasons its results missed Wall Street estimates. On the news, investors sent the company's shares down more 4 percent.

Greg Foran, who had been president and CEO of Wal-Mart Asia and took over Wal-Mart's U.S. business last summer, asked for investor patience.

"We're not interested in reaching our goals, but reaching them in a way which is sustainable for the long term," Foran said in a pre-recorded call. "This requires a steady execution, a pace that is fast but calculated, and one that allows us to get it right."

Wal-Mart's results adds to questions about the health of consumer spending. The latest government retail sales figures showed spending was flat in April, and Macy's, Kohl's and J.C. Penney announced disappointing results despite low gas prices and improvements in the job market.

Because of its size and reach, Wal-Mart is a barometer of consumer spending. The company, based in Bentonville, Ark. had a 1.1 percent increase for sales at U.S. Wal-Mart stores open at least a year. It was its third consecutive quarter of increases, but the growth was slightly below analysts' expectations.

The company is facing challenges, including that its low-income shoppers are struggling: Wal-Mart pointed out that its customers are either pocketing tax refunds and their savings from lower gas prices or using the extra money to pay down debt or bills like utilities.

The company also is dealing with competition from the likes of online king Amazon.com, dollar stores and grocers. It's also dealing with a shift among shoppers seeking the convenience of small stores or buying on their mobile devices and PCs.

Wal-Mart is doing a number of things to improve results. It's increasing its spending for its online operations to between $1.2 billion and $1.5 billion this year, up from $1 billion last year: It announced last week it was testing an unlimited free-shipping service for $50 a year, undercutting Amazon's popular Amazon Prime, whose annual dues are $99.

At its Wal-Mart's U.S. division, which accounts for 60 percent of its total sales, the company is trying to improve its selection and customer service, while making sure it has the lowest prices. It expects to see tidier stores and improved offerings by the holiday shopping season, executives told investors in April.

And as part of the strategy to turn around its business, the company raised the minimum wages for its hourly workers to $9 per hour in April. By February 2016, all hourly workers will make at least $10 per hour.

It's part of a $1 billion investment in its workforce that also includes improved training. Wal-Mart is hoping that by investing in its people, Wal-Mart will improve customer service, resulting in happier customers who will spend more.

"It's a big unknown. I think they'll get a payoff, but it's going to take time," said Brian Sozzi, CEO and chief equities strategies at Belus Capital Advisors, referring to the company's investments in its workforce. "It may not be as strong or quick as Wall Street expects."

During a conference call with the media, Charles Holley, Wal-Mart's chief financial officer, said the wage increases are already resulting in improved marks in customer service from shoppers, according to an internal survey. "We do think it will have a positive effect on sales," he said.

But for now Wal-Mart has to contend with a squeeze on profits.

Wal-Mart said that net income was $3.34 billion, or $1.03 per share, for the three months that ended April 30. That compares with $3.59 billion, or $1.11 per share, a year earlier.

Net revenue was down slightly to $114.0 billion, from $114.2 billion in the year-ago quarter. The quarter marked the third consecutive period of growth in revenue at stores opened at least a year, after a string of either quarterly declines or flat sales.

Analysts were expecting $1.04 per share and revenue of $116.27 billion, according to Zacks Investment Research.

Wal-Mart expected earnings per share for the current quarter to be in the range of $1.06 to $1.18 per share. Analysts expected $1.17 per share, according to FactSet.

Shares fell $3.49 to close at $76.43 on Wednesday.