Attention, Wal-Mart investors: You'd better saddle up for a bumpy ride.
Shares of the world's largest retailer extended their year-to-date losses when they fell 3 percent on Tuesday, after the company reported weaker-than-expected second-quarter earnings and slashed its full-year outlook.
This marked the second straight quarter when Wal-Mart's profit fell short of expectations, as the cost of paying higher wages to its associates, investments in its online and in-store businesses, theft and the spoiling of fresh foods contributed to another decline in operating income—its sixth in the last seven quarters, according to Retail Metrics.
For patient investors, however, the quarter signaled a further improvement in Wal-Mart's domestic operations, including its best same-store sales result in three years, and a third consecutive quarter of higher traffic.
These improvements attest that the company's investments are already bearing fruit, and should drive profit higher in the long-term.
"When you're doing the things that Wal-Mart is doing, you're going to see some choppy earnings," said Moody's analyst Charles O'Shea. "This isn't a short-term story by any stretch of the imagination."
Walmart U.S. CEO Greg Foran openly admitted to investors that the aforementioned costs, along with lower-than-expected reimbursements in its pharmacy business, "will present continuing profit challenges for the remainder of the year."
Following the company's decision to raise wages for its store employees to a minimum $9 an hour—a change that took place in April—Wal-Mart said pay increases, training costs and additional store hours will decrease its earnings per share by 24 cents this year. This impact will continue to be felt next year, when the retailer will boost employee pay to $10 an hour for many workers.
The company also quantified a hit of 6 to 9 cents a share this year to improve its Web operations. Although these investments will cause short-term pain for the stock, they're critical to the long-term health of the retailer—something investors are already starting to see come through in its results.
For example, as Foran has placed a greater emphasis on keeping more registers open during peak shopping hours, better-maintaining its stores and ensuring shelves are well-stocked, traffic at its U.S. stores rose 1.3 percent during the quarter. Similarly, same-store sales grew 1.5 percent.