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. At its Sam's Club chain, comparable sales fell 0.1 percent, 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. (Reporting by Phil Wahba in New York; Editing by Jilian Mincer, Lisa Von Ahn, Bernadette Baum and David Gregorio)