The Puerto Rico unit of Wal-Mart Stores Inc. WMT has recently sued the island’s government over an increase in an import tax that would take away 91% of its profits on the island, as per Bloomberg.
As per Puerto Rico’s act (enacted in May), the tax rate has increased to 6.5% from 2%. This tax is levied on goods imported from offshore affiliates to local companies with gross revenues of more than $2.75 billion.
The move to increase tax rate comes as the U.S. commonwealth struggles to restructure $70 billion in debt, more than every U.S. state but New York and California. This week, the U.S. Supreme Court agreed to consider reinstating a law that would let Puerto Rico’s debt-ridden public utilities restructure their obligations.
We note that Bentonville, AK-based Wal-Mart is Puerto Rico’s biggest private employer and pays more sales tax to the island government than any other business. Now, the new tax hike will push Wal-Mart Puerto Rico Inc.’s effective tax rate to 91.5% of net income, which is unfairly high.
Further, the tax increase will cost Wal-Mart $155 million over six years and make its Puerto Rico business unsustainable. Wal-Mart has filed a complaint in the federal court in San Juan on Friday and is urging quick action to block its enforcement.
Wal-Mart is already struggling with sluggish U.S. sales. It is also facing intense competition on all fronts, ranging from dollar stores to traditional grocery store chains and online business. Its international operations are also under pressure with a stronger dollar eating into sales.
At the same time, Wal-Mart projects slower growth in new stores. Price competition is one of the reasons for the deceleration. Wal-Mart is finding it difficult to compete with local grocers in some markets, which compelled it to scale back expansion plans for smaller stores. Wal-Mart also expects to incur huge e-commerce expenses over the near term.
Higher labor costs along with the company’s efforts to overhaul its stores and invest in its online operations are weighing on its earnings.
Therefore, the company is concerned about this rate hike as it will further put pressure on the company’s profits.
Wal-Mart has a Zacks Rank #3 (Hold).
Stocks to Consider
Some well positioned retailers worth considering include The Kroger Co. KR, Ross Stores, Inc. ROST and Foot Locker, Inc. FL. All of them hold a Zacks Rank #2 (Buy).
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