Wal-Mart Stores Inc. Thursday cut a sales forecast made just four months ago, surprising investors again and dimming hopes that heavy spending on upgrading its stores, e-commerce operations and wages will bring quick growth.
Sales this fiscal year will be "relatively flat," Wal-Mart said in its earnings release, a downgrade from October when executives predicted sales growth between 3% to 4%. It is the latest in a string of repeated forecast cuts by the retailer.
The company said the downgrade wasn't due to sales trends, but reflects the impact from recently announced store closures, as well as the continued strengthening of the U.S. dollar. Excluding the impact of currency and store closures, Wal-Mart said the sales growth forecast would have held steady.
Wal-Mart shares fell 4.5% in recent trading to $63.14, its steepest decline since October when the company warned that profit this fiscal year could fall as much as 12%. Over the past year, its shares are down 24%.
The reaction is evidence of the high wire act Wal-Mart Chief Executive Doug McMillon is performing in asking investors to accept lower profits in the short-term for a better outcome in the future. The Bentonville, Ark.-based retailer is spending heavily to improve stores and boost e-commerce sales in its fight against stiff competition from the likes of Amazon.com Inc., grocers like Kroger Co. and smaller retailers including dollar stores, but at a cost to profitability.
Wal-Mart says the plan is working. Sales at Wal-Mart's existing U.S. stores rose for the sixth straight quarterly gain after a long stretch of declines but only ticked up 0.6%, short of analysts' forecasts of 1% growth, according to Consensus Metrix. The quarter ended Jan. 31, 2016, included the key holiday shopping period. The number of people visiting Wal-Mart's stores rose 0.7%, the fifth straight quarterly increase.
"We do see an underlying strength in our Wal-Mart U.S. business that wasn't there a year ago," Mr. McMillon said Thursday. "This past year has been a year of investment, operational improvement and change."
Inventory levels have fallen and customer satisfaction scores are improving, according to Wal-Mart executives, and store employee turnover has fallen in the wake of wage increases. After raising the minimum hourly wage to $9 last year, it will boost it further to $10 for on Saturday for most of its one million strong store employees.
In all, Wal-Mart posted an 8% drop in fourth-quarter profit to $4.57 billion. Revenue fell 1.4% in the period ended January 31 to $129.7 billion, below analyst forecasts.
Wal-Mart is contending with external headwinds. Executives said the strong dollar and falling prices of meat and dairy took a bite out of revenue, and executives also cited a delay in IRS tax refund checks in late January and warm weather.
"While customers benefited from lower gas prices, we experienced significant headwinds from deflation," said Wal-Mart U.S. CEO Greg Foran on a pre-recorded call to discuss earnings. Mr. Foran expects deflationary pressure to continue through the first quarter of fiscal year 2017, he said on a call later with reporters.
Wal-Mart's weaker sales forecast didn't add clarity to a retail picture that has remained murky over the last year. While the U.S. consumer seems to be strengthening, benefiting from higher wages, lower unemployment and cheap gas, many big retailers are struggling with fundamental changes in shopping habits.
In response to those shifts, Wal-Mart is spending upward of $5 billion on several initiatives including wage increases, e-commerce development and steps to lower prices, a necessary measure for a retailer that relies heavily on low prices to draw shoppers. According to annual surveys from Kantar Retail, a research and consulting firm, Wal-Mart's reputation for having the lowest prices is eroding. In 2015, 22% of shoppers said Wal-Mart had the lowest prices for food, compared with 25% in 2011.
"The results demonstrate the need for the investments they are making," said Robert Drbul, retail analyst at Nomura Holdings Inc.
Wal-Mart's e-commerce sales continued to decelerate, up 12% in fiscal year 2016 compared with a 24% increase the previous year. Executives pointed to a weak economy in Brazil and China and strong competition in the U.K. for the slowing figures.
For the 12 months ended Dec. 31, Amazon.com Inc. North American sales rose 25%. "That is clearly impacting Wal-Mart," said Mr. Drbul.
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com and Sarah Nassauer at sarah.nassauer@wsj.com
