Walmart: Wage hikes are killing our profits

Walmart CEO on wages: We are a ladder of opportunity

Wall Street rolled back Walmart's stock price Wednesday after the retailer issued a gloomy outlook.

Walmart said the strong dollar was hurting sales this year and that wage increases for its employees would eat into profits next year.

Shares of Walmart (WMT) plunged 10% to a 3-year low on the news. It was the worst percentage loss for the stock since 1988.

Walmart chief financial officer Charles Holley said that investments in wages and training would lower operating profits by about $1.5 billion in fiscal 2017 -- essentially all of next year and January 2017.

Related: Union ads target Walmart during Democratic debate

As a result, Holley said overall earnings were likely to be down between 6% and 12% from this year. The hope, Holley added, is that earnings would be growing again by 2019.

Walmart had been under increased pressure to pay employees more. It finally agreed to do so for more than 600,000 workers earlier this year.

Several cities and states have forced the issue by raising local minimum wages.

So higher labor costs are suddenly a major pressure point for Walmart as well as companies like Target (TGT)and McDonald's (MCD).

But one union that has been critical of Walmart said the company is using the wage hikes as an excuse for its poor performance.

"Walmart should be ashamed for trying to blame its failures on the so-called wage increases. The truth is that hard-working Walmart employees all across the country began seeing their hours cut soon after the new wages were announced," said Jess Levin, a spokesperson for the United Food & Commercial Workers International Union.

The union, which has a campaign called Making Change at Walmart, ran two ads during the Democratic debate on CNN Tuesday.

And it's true that Walmart has bigger concerns than how much it pays its workers. Sales have been sluggish due to tough competition from Target, Costco (COST) and Amazon (AMZN, Tech30).

Related: Walmart cuts 450 employees

Walmart is also investing heavily to try and catch up online. And that will hurt profits in the short-term as well.

Brian Yarbrough, an analyst with Edward Jones, added that a bigger problem for Walmart is that it is also losing ground to supermarkets like Kroger (KR).

More than 55% of Walmart's overall sales come from its grocery business. But Yarbrough argues that Walmart is no longer viewed as a convenient and affordable option to regular supermarket chains.

"The customer is not buying groceries there. How does Walmart fix that?" Yarbrough said. "They are in an extremely tough position. It's hard to bring in new customers but it's easy to lose them.'

Walmart's bad news was greeted as a negative for the entire retail sector though.

Shares of Target fell more than 4% while Kohl's (KSS), Sears (SHLD) and JCPenney (JCP) all sank as well.

Walmart's bombshell follows a weak retail sales report from the government on Wednesday.

Consumer spending barely budged in September, and August's retail sales figures were revised lower to show that spending was essentially flat.

Walmart also said it was planning to buy back $20 billion in stock. However, that wasn't enough to offset the terrible guidance.

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