Wal-Mart’s push to revamp stores is showing results

Shannon Pettypiece
Bloomberg News
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Wal-Mart Stores Inc.’s push to revamp its U.S. stores and beat back increased competition may be starting to show results, even as the cost of those plans weighs on earnings.

The retailer’s profit topped analysts’ estimates in the third quarter, lifted by gains in same-store sales and foot traffic. Wal-Mart also raised the low end of its annual profit forecast, helping boost the stock 3.5 percent.

The numbers brought a dose of good news to investors after a dour profit forecast crushed the shares in October, sending them into their worst tailspin in almost three decades. Wal-Mart showed progress on its turnaround plan on Tuesday, especially the store-improvement campaign. Almost three-quarters of its U.S. locations now pass the company’s new standards for customer service, cleanliness and convenience.

Wal-Mart still has a long way to go, but the company helped reassure investors concerned about a broader retail slump, said Meredith Adler, an analyst at Barclays Capital in New York.

“Expectations have come down a lot, and they met them,” she said.

Earnings were 99 cents a share in the period, excluding some items, the Bentonville, Arkansas-based company said on Tuesday. Analysts had predicted 98 cents on average, according to data compiled by Bloomberg. The company now expects profit of $4.50 to $4.65 a share this year, compared with a previous forecast of $4.40 to $4.70.

Chief Executive Officer Doug McMillon, who took the reins last year, has invested in e-commerce and smaller-format stores — a bid to cope with online rivals like Amazon.com Inc. But Wal-Mart’s supercenters remain key to his turnaround bid, and he’s working to make them more enticing. Same-store sales rose 1.5 percent in the U.S. last quarter, while traffic grew 1.7 percent.

“We will grow the company faster,” McMillon said on a conference call. “We will add between $45 billion and $60 billion in revenue to the company in the next three years. That is a lot of growth — it just happens to be on a big base.”

The shares close up 3.5 percent to $59.92 on Tuesday in New York. Wal-Mart had lost a third of its market value this year through Monday’s close.

Wal-Mart suffered its worst stock decline in more than 27 years on Oct. 14 when it said earnings would decrease as much as 12 percent next year. The strong dollar also has hurt the value of Wal-Mart’s overseas sales, contributing to a 1.3 percent revenue decline last quarter.

Wal-Mart is fixing up its 4,600 U.S. stores after years of customer complaints about out-of-stock items, poor customer service and long waits at the checkout line. As part of an effort to improve operations, McMillon announced plans in February to raise wages for 500,000 workers. The idea is the higher pay will help the company recruit and retain better employees. The retailer bumped its starting level to $9 an hour earlier this year and plans to make it $10 in 2016.

In February, only 16 percent of its 4,600 U.S. locations met the company’s new standards for cleanliness and customer service. That number has now reached 70 percent, Wal-Mart said on Tuesday.

But McMillon’s push to modernize Wal-Mart has taken a toll on profit. The wage increase and training programs will add $2.7 billion in expenses over a two-year period, and investments in e-commerce are forecast to total as much as $1.5 billion this year.

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