Walmart Inc. surprised everybody with a lower profit outlook in sharp contrast to McDonald’s and Coca – Cola upbeat results. Clubbing the results together suggests Consumers have little left for discretionary items after spending on fuel and food.
After adjustment, Walmart’s earnings per share will fall around 13% this fiscal year. As consumer prices soar, US shoppers are spending less on big-ticket goods and focusing on groceries, Walmart said Monday.
Two months ago, Walmart said its profit would only dip by around 1 %. Earlier in February, it predicted a slight increase. On Tuesday, Walmart slipped 8.5% at its intraday low since May 17. Competitors Amazon.com Inc. and Target Corp. shares also fell through their more upscale customers may be more resilient.
Walmart led the week of bellwether earnings reported by consumer goods giants. But Mcdonald’s and Coca-Cola posted earnings that surpassed expectations, with consumers’ spending on fast food and soft drinks continuing.
Last month Target Corp. lowered its profit forecast as merchandized stockpiles with customers reluctant to buy as inflation hits a four-decade high. Walmart said it faced similar pains and slashed its apparel goods prices.
More Pressure
An analyst at Edward Jones, Brian Yarbrough, said that Walmart caters to low-income groups and hence feels more pressure. The dim outlook by Walmart allows investors and US policymakers to factor in and determine which direction interest rates and the economy will head in the coming months.
The Federal Reserve is expected to increase 75 basis points later this week. They look to tame the stubborn inflation even as signs of the economy going into recession show.
The GDP result on Thursday will confirm if there is a contraction in the economy for two consecutive quarters. This will make the task of the Central bank difficult as it looks to cool inflation without hurting economic activity.
In an interview, Jennifer Bartashus of Bloomberg Intelligence said consumer confidence decreases if retailers like Walmart are impacted.
Pandemic Build-up
Retailers forecast lower profits due to inventory build-up after supply chain constraints and surging demands. Even though the pandemic has not gone, life is returning to normal with unpredictable swings in demand, resulting in retailers stuck with unwanted merchandise. Meanwhile, Consumers are shifting spending to restaurants and travel apart from dealing with inflation.
CEO Doug McMillan, in a statement, said that the good news is the sales of back-to-school goods have encouraged Walmart. The company has cleared its consumer durables inventories and expects sales to climb 6% in the second quarter.
McMillan said groceries have lower margins than general goods. The rich mix of consumables and food is hurting gross margins. The Bentonville, the Arkansas-based retailer, said an additional markdown is required for apparel.
Walmart expects operating income to decline by 13 % to 14% for the second quarter and 11% to 12% for the entire year. It will report its earnings on August 16.
