Wal-Mart Stores Inc shares fell 4.7 percent in early trading on concerns that an investigation into allegations of bribery at its Mexican affiliate and how those allegations were handled by top management could be costly to the company and hinder attempts to expand.
Shares of affiliate Wal-Mart de Mexico, Walmex, were down 6.56 pesos at 36.50. The drop has wiped out the year-to-date gains in the stock, which had been up 12 percent through Friday.
The New York Times this weekend reported that the world's largest retailer stymied an internal probe into bribery at its Mexican affiliate, in the middle of the last decade. The allegations if true could be violations of the Foreign Corrupt Practices Act (FCPA), a U.S. law that forbids the payment of bribes to foreign government officials.
"FCPA cases are both extensive and expensive, including penalties for individuals/entities for both anti-bribery and accounting provisions," Deutsche Bank retail analyst Charles Grom said.
Wal-Mart said it had disclosed its probe to the U.S. Department of Justice and the Securities and Exchange Commission. The company also said it had taken steps at the Mexican unit, which is widely known as Walmex, to boost internal controls to make sure it was FCPA compliant.
But the New York Times said the disclosure only came after it informed Wal-Mart that it was looking into the bribery allegations, years after the bribes were said to have been brought to management's attention.
BMO Capital Markets analyst Wayne Hood said in a research note that the allegations could hamper the discount chain's future growth both domestically and abroad.
"Articles like this will be used against the company by activists and competitors when it attempts to open stores in the U.S. and abroad," Hood wrote in a note on Monday.
According to the Times article, in September 2005, a senior Wal-Mart lawyer was alerted by a former executive at Wal-Mart de Mexico of the use of bribery to speed up store openings in Mexico.
Wal-Mart then sent investigators to Mexico City and found a paper trail of hundreds of suspect payments totaling more than $24 million, but the company's leaders shut down the investigation and neglected to notify U.S. or Mexican law enforcement officials, the paper reported.
Citigroup said in a note that, after discussions with Wal-Mart, it believed that the retailer would conduct a "thorough and transparent" review and said any pressure on the stock was "an enhanced buying opportunity."
Legal and retail experts said the allegations, if proven to be true, could badly hamper the company and its management for years, potentially leading to a time-consuming global probe, substantial financial penalties paid to U.S. authorities, and the departure of some executives.
Wal-Mart shares were down $2.98, or 4.7 percent, at $59.46 in early trading on the New York Stock Exchange.
Hedge fund managers said Sunday that Walmex could be the more attractive target for short sellers between the two stocks.
(Reporting By Martinne Geller, Brad Dorfman, Elinor Comlay and Phil Wahba in New York; Editing by Dave Zimmerman and Maureen Bavdek)