Topline
Shares of Walmart fell nearly 10% in after-hours trading on Monday after the company slashed its profit outlook for the second quarter and rest of the year, warning that high inflation is having an impact on consumer spending habits.
Key Facts
The nation’s largest retailer announced that it was lowering its profit outlook for the rest of 2022, “primarily due to pricing actions aimed to improve inventory levels at Walmart and Sam’s Club in the U.S.”
Walmart now expects earnings per share for the second quarter and full year to each decline by 8% to 9% and 11% to 13%, respectively—far lower than previous estimates of slightly positive earnings growth in the current quarter and a slight 1% decline for the full year.
The company said it expects same-store sales, excluding fuel, to rise by around 6% in the second quarter, with management describing that customers were cutting back on pricier items and instead spending more on groceries.
Food inflation has hit “double digits” and is notably higher than in the previous quarter, Walmart noted, a trend that has begun to affect margins as consumers spend less on general merchandise, sales of which yield bigger profits.
The company also warned of “more markdowns” as it continues to try and reduce extra inventory, while it will also continue “managing prices to reflect certain supply chain costs and inflation.”
Walmart’s stock plunged on the news, while shares of rival retailers also suffered in after-hours trading, with Target falling over 5%, Amazon 4%, Kohl’s 3%, Costco 2% and Kroger around 1.5%.
Crucial Quote:
“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” said Walmart CEO Doug McMillon in a statement. “We’re now anticipating more pressure on general merchandise in the back half [of the year].”
Surprising Fact:
Before the latest announcement, Walmart shares were down by just a few percentage points so far this year—outperforming the broader S&P 500 index, which has fallen over 17%. The SPDR S&P Retail ETF, which counts Walmart and Target as holdings, is down more than 30% this year, and fell another 3% in after-hours trading on Monday following the Walmart news.
Key Background:
Gloomy outlooks from major retailers in the first quarter spooked investors and caused a major selloff amid fears of high inflation affecting consumer spending. Big names like Walmart and Target both saw large stock declines earlier this year after reporting rising costs and inflationary pressures weighing on profits. While retailers have so far coped with rising recession fears, Wall Street analysts continue to warn about an ongoing shift in consumer spending, as Americans are increasingly forced to rethink everyday purchases in the face of higher prices.
Further Reading:
New China Covid-19 Lockdowns Would Threaten U.S. Economic Recovery (Just Ask Tesla) (Forbes)
Federal Reserve Prepares More Big Rate Hikes Amid Risk That High Inflation Could ‘Become Entrenched’ (Forbes)