Walmart Tumbles as Discounts Spur New Cut to Profit Forecast

(Bloomberg) — Walmart Inc. cut its profit outlook again in a surprise warning weeks ahead of its earnings report, sending retailer shares tumbling and raising new questions about US consumers’ ability to sustain their voracious spending habits with inflation at a four-decade high.

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Adjusted earnings per share will fall as much 13% in the current fiscal year as US shoppers spurn big-ticket items and focus on buying less-profitable groceries amid soaring inflation, Walmart said in a statement Monday. Two months ago, the world’s largest retailer said earnings per share would only dip about 1%. In February, the company had predicted a modest increase.

Walmart’s warning kicks off a week of bellwether earnings reports from consumer-goods giants including Coca-Cola Co., McDonald’s Corp. and Procter & Gamble Co. Another big US retailer, Target Corp., cut its profit forecast last month, citing the cost of whittling merchandise stockpiles that its customers were increasingly reluctant to buy. Walmart said it was feeling similar pain as it slashes prices on some goods such as apparel.

“This will potentially send shock waves through the sector,” said GlobalData’s Neil Saunders. “When things go wrong at Walmart, you can extrapolate that it’s happening at other retailers, as well.”

Walmart slid as much as 10% in late trading to $118.77. The shares had dropped 8.8% this year through today’s close. Target, Amazon.com Inc. and Costco Wholesale Corp. also declined in late trading, although their more upscale customers may prove more resilient.

‘More Pressure’

“Walmart is seeing more pressure because they cater to a low-income customer,” said Brian Yarbrough, an analyst at Edward Jones.

The dimmer outlook at Walmart gives US policy makers and investors a late-breaking data point to factor in as they try to determine where the economy and interest rates will be headed over the coming months.

The Federal Reserve is widely expected to increase its key policy rate by three quarters of a percentage point later this week, looking to tamp down stubborn inflation even as signs accumulate that the economy could be tilting into a recession.

A reading on gross domestic product due Thursday could confirm that the economy has contracted for two quarters in a row. That makes the Fed’s task even more delicate as it tries to cool off rising prices without causing a more severe downturn in activity.

“When something impacts a retailer that everyone knows like Walmart, that can lead to a further slide in consumer confidence,” Jennifer Bartashus of Bloomberg Intelligence said in an interview. “That can lead us down a recession road.”

Pandemic Buildup

For retailers, weakening profit forecasts are emerging as the painful consequence of building up inventories after years of supply-chain constraints and booming demand. Now that life is returning to normal — even if the pandemic hasn’t gone away — retailers are increasingly stuck with stockpiles of unwanted merchandise amid unpredictable swings of demand.

Consumers, meanwhile, are not only contending with inflation but also shifting more spending to services such as travel and restaurants.

On the plus side, Walmart has been encouraged by US sales of back-to-school goods, Chief Executive Officer Doug McMillon said in the statement. Comparable sales in the US are set to climb 6% in the second quarter, which is higher than expected, and the company has also made progress in clearing out inventories of consumer durables.

But additional markdowns are needed for apparel, he said. In addition, “a heavier mix of food and consumables” is hurting gross margin, a broad measure of profitability, the Bentonville, Arkansas-based company said. Groceries tend to have lower margins than general merchandise.

See also: Inflation-battered Americans get chance to go bargain hunting

Operating income will fall 13% to 14% for the quarter and 11% to 13% for the full year, Walmart said. The retailer reports earnings on Aug. 16.

“The increasing levels of food and fuel inflation are affecting how customers spend,” McMillon said. “We’re now anticipating more pressure on general merchandise” in the second half of the year.

(An earlier version of this story corrected the forecast cut.)