Retail chain giant Wal-Mart (NYSE: WMT) shares plunged the most in over 15 years Wednesday, dragging on the consumer staples and retail sector-related exchange traded funds.
Wal-Mart’s stock fell over 9% Wednesday, its larges fall since February 2000, after the firm projected that earnings will decline 6% to 12% in the fiscal 2017, citing higher operating expenses that could top sales growth for the year, while analysts estimated a gain of 4% on average, reports Shannon Pettypiece for Bloomberg.
The outlook was “far worse than anyone expected,” Charles Grom, an analyst with Sterne Agee & Leach, said in a note.
Meanwhile, on Wednesday, the Consumer Staples Select SPDR (NYSEArca: XLP) dipped 0.8%, Vanguard Consumer Staples ETF (NYSEArca: VDC) dropped 0.7%, Fidelity MSCI Consumer Staples Index ETF (NYSEArca: FSTA) fell 0.9% and Market Vectors Retail ETF (NYSEArca: RTH) retreated 2.0%.
WMT makes up 6.0% of XLP, 4.8% of VDC, 5.7% of FSTA and 7.5% of RTH.
Weighing on Wal-Mart’s profit margins, the company has put money into its workforce and e-commerce platform. Wal-Mart raised employee wages to $9 per hour in April and could lift it up to at least $10 next year, along with an expanded training program.
Additionally, the chain retailer will be buying back $20 billion in stocks over a two-year period after $15 billion in stock repurchases that begun in 2013.
The move “implies significant margin contraction along with modest sales growth,” Grom added.
The dip in the broader consumer staples and retail sector may be short-lived as the Wal-Mart weakness is related to more structural changes within the individual company, albeit Wal-Mart is still the largest retailer in the world. The broader sector may still move on improving economic strength ahead.
Consumer Staples Select SPDR
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Full disclosure: Tom Lydon’s clients own shares of XLP.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.