By Senad Karaahmetovic
Shares of Walmart (NYSE:WMT) are down almost 9% in premarket trading Tuesday after the retailer trimmed its full-year profit outlook as the record-high inflation continues to weigh on consumer spending.
Walmart now expects adjusted earnings per share (EPS) for Q2 and full year to slip about 8% to 9% and 11% to 13%, respectively. This compares with the previous guidance when the retailer expected EPS to be flat to up slightly in Q2 and to decline by roughly 1% for the full year.
Walmart said higher costs of goods and services caused a significant change in consumer buying habits, who now spend more on essential items like food and less on electronic devices and clothes. As a result, Walmart’s inventory has significantly increased, forcing the company to mark down items that have seen a slump in demand.
The shift in consumer spending comes as inflation continues to hover around its 4-decade high, propelling the prices of goods and services. Consequently, consumers are now more cautious when spending their money, focusing more on necessities such as food.
Walmart, often viewed as a good indicator of the economy’s health, said more customers are coming to its stores to fill their fridges and pantries, spending significantly less on general merchandise.
The company said it expects Q2 same-store sales in the U.S. to increase by around 6%, excluding fuel, up from the previous forecast of a 4% to 5% increase.
“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,” CEO Doug McMillon said.
A Piper Sandler analyst is “concerned about near-term pressures within consumer”. As a result, the analyst reiterated his below-the-consensus views.
“We think it remains too early to take a more constructive stance on WMT/TGT (or our coverage broadly) and await a broader earnings expectations reset. At ~22x CY23E EPS, valuation seems fairly full given the tough retail environment,” he told clients.
However, the analyst expects to see “broad downward guidance revisions across our space, with the weakness most pronounced at retailers/brands that focus on a lower- and middle-income consumer”.
Net-net, he prefers Target (NYSE:TGT) “given its exposure to a higher-end consumer”.
An analyst from Goldman Sachs wasn’t surprised as conversations with investors showed that they have been anticipating a cut from Walmart. She cut the Walmart stock price target to $135.
“We acknowledge the company's improving profitability profile will now take longer to come to fruition (we estimate beginning in FY23), but we reiterate our Buy rating (on CL) for WMT given strong top line trends supported by market share gains, the incremental cost pressures are largely temporary with solid visibility into the path towards improvement, and the long-term algorithm (+4% top line and even better operating income growth) remains intact,” the analyst added.