Wal-Mart profit miss estimates; cuts outlook as pharmacy margins bite

By Nathan Layne

(Reuters) - Wal-Mart Stores Inc reported weaker-than-expected quarterly earnings and lowered its annual forecast on Tuesday, citing higher costs from adding worker hours as well as weaker margins in its U.S. pharmacy business.

Shares of the world's largest retailer fell 3.1 percent to $69.71 to trade at its lowest in 2-1/2 years.

Net profit attributable to the company fell to $3.48 billion, or $1.08 per share, in the second quarter ended July 31, from $3.92 billion, or $1.21, a year earlier. Analysts, on average, expected $1.12 per share, according to Thomson Reuters I/B/E/S.

Wal-Mart lowered its forecast for the year ending in January to a range of $4.40 to $4.70 from its outlook of $4.70 to $5.05 in February. The consensus was for $4.77 per share.

Wal-Mart logged a 1.5 percent increase in U.S. comparable sales at stores open at least a year, raising concerns about whether it can grow revenue fast enough to compensate for increased wage and other expenses.

"Unless sales really ramp up they are going to continue to see profits pressured," said Edward Jones analyst Brian Yarbrough. "With this new model of all these investments, I don't know if they can even leverage expenses at a 2 or 2.5 percent same-store sales comp."

In February Wal-Mart had flagged it would spend $1 billion to lift workers' pay and for training, which will weigh on earnings this year. It also warned of higher spending to boost its e-commerce infrastructure as it seeks to close the online gap with Amazon.com Inc, which recently passed the Arkansas-based retailer in market value.

But on Tuesday Wal-Mart said costs to increase worker hours beyond the February plan, as it tries to improve customer service with faster checkouts and better-stocked shelves, were denting earnings more than anticipated.

It also said reduced reimbursement rates from pharmacy benefit managers were hurting margins in its U.S. pharmacy business and that wider healthcare insurance coverage generally had led to fewer higher-margin cash transactions on drugs.

Another problem is increasing "shrink," a retail industry term for losses tied to various issues including theft.

In one bright spot, the company said sales at stores open more than a year in the United States increased 1.5 percent in the 13 weeks ended July 31 from a year earlier. Analysts polled by research firm Consensus Metrix expected a 1.0 percent rise.

Wal-Mart Chief Financial Officer Charles Holley told an earnings conference call that while lower gasoline prices helped drive sales, the bulk of the gains were due to increased investments in its stores as well as in wages and training.

The retailer lowered its forecast for opening smaller-format stores, and now plans to open 160 to 170 Neighbourhood Markets locations for the full year, down from 180 to 200. It said it was still on track to open 60 to 70 Supercentres this year.

(Reporting by Nathan Layne in Chicago; Editing by Lisa Von Ahn and Jeffrey Benkoe)