Walmart forecast disappoints as grocery business struggles

Plans to double number of smaller stores to combat sluggish sales

The struggles of the low-income US consumer are playing out in Walmart 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. Walmart shares fell 2.2% in morning trading.

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

Walmart's US 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 Walmart'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% last quarter, compared to an overall 0.4% drop in the United States.

Walmart 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. Walmart operates 4,000 super-centers.

Expansion of Walmart'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%.

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

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

Walmart shares fell 2.2% 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 Walmart 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% to $129.7 billion.

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

At its Sam's Club chain, comparable sales fell 0.1%, while rival Costco Wholesale Corp posted gains.

Overseas, comparable sales fell in key markets such as Canada and Britain.

The company earned $1.60 per share excluding items, down from $1.67 a year earlier, but one cent better than expected.