Wal-Mart forecast disappoints as grocery business struggles

The Walmart logo is pictured at its store in the Porter Ranch section of Los Angeles November 26, 2013. REUTERS/Kevork Djansezian

By Phil Wahba

(Reuters) - The struggles of the low-income U.S. consumer are playing out in Wal-Mart Stores Inc's grocery aisles.

The world's largest retailer, which gets more than half its sales from groceries, on Thursday gave a disappointing full-year forecast. It blamed sharp cuts in food stamp benefits and higher payroll taxes that are will hit disposable income for its core customers. Wal-Mart shares fell 2.2 percent in morning trading.

To combat sluggish sales, broaden its customer base and fend off aggressive rivals, Wal-Mart said it was doubling the number of smaller new stores it originally planned to open this year.

Wal-Mart's U.S. comparable sales, e-commerce and sales at stores open at least a year, fell for the fourth quarter in a row, slammed by a drop in its grocery business and aggressive price cuts during a tough holiday shopping season.

The smaller stores, typically one quarter the size of Wal-Mart's supercenters, allow the retailer to reach new customers, particularly in urban areas. They also appeal to shoppers who want to pick up groceries and other staples mid-week without making a trip to an enormous supercenter.

"The smaller format is a way to address the problems at grocery, but it's going to take multiple years for it to have a positive impact on overall results," said Edward Jones analyst Brian Yarbrough.

Comparable sales at the smaller stores rose 5 percent last quarter, compared to an overall 0.4 percent drop in the United States.

Wal-Mart now plans to open between 270 and 300 small stores this fiscal year, in addition to the 346 currently in operation, and is spending an extra $600 million to do so. It had planned to open 120 to 150 new small stores this year. Wal-Mart operates 4,000 super-centers.

Expansion of Wal-Mart's e-commerce will also eat into this year's profits.

The company expects net sales growth this year to come in at the low end of its forecast range of 3 to 5 percent.

The cuts last year to benefits under the Supplemental Nutrition Assistance Program, the largest U.S. anti-hunger program, have been particularly painful for Wal-Mart. One in five Wal-Mart shoppers relies on food stamps, according to Cowen analyst Tal Lev. Wal-Mart also faces stiff competition from dollar stores for lower-income shoppers.

During the quarter, comparable grocery sales fell by a "low-single-digit" percentage. In contrast, higher-end supermarket operators Kroger Co and Safeway Inc reported increases for their most recent quarters.

Wal-Mart shares fell 2.2 percent to $73.21 in morning trading on the New York Stock Exchange.

SPEND MONEY TO MAKE MONEY

The retailer plans to increase its spending on integrating its stores with e-commerce, saying efforts such as using stores to fill online orders during the holiday season had been successful.

E-commerce sales crossed the $10 billion threshold last fiscal year and the company is fighting Amazon.com Inc to win online shoppers.

Investment in both the small stores and e-commerce will hit profit, and the Wal-Mart said it expects earnings of $5.10 to $5.45 per share this year. Analysts expect about $5.54 a share, according to Thomson Reuters I/B/E/S.

Overall revenue in the quarter through January 31, which included the key holiday season, grew 1.4 percent to $129.7 billion.

Wal-Mart Chief Executive Doug McMillon, who took the reins this month, said the company would use "price investment," company-speak for lower pricing, to revive U.S. sales.