It wasn’t supposed to be like this.
Walmart Inc. is the world’s biggest retailer, with stores that are a beacon of low prices and a corporate culture that is famously penny-pinching. If anyone was to thrive in the current economic environment, it should have been the big-box retailer. And yet, on Monday it warned on profit for a second time in just over two months. That is an ominous sign for the whole consumer sector and the broader US economy.
Walmart isn’t losing customers. In fact, its low-price mantra is attracting them. The company said earlier this year that during periods of inflation all customers — low-, middle- and higher-income families — become more price-conscious. That is encouraging them to shop at Walmart. It now expects second-quarter US same-store sales, excluding fuel, to increase by about 6%, slightly ahead of its previous guidance of a 4%-5% expansion.
The trouble is, as consumers are becoming more thrifty, they are changing their shopping habits in ways that are far less helpful for the retailer.
With US inflation at a 40-year high, and food-price inflation running at a double-digit percentage, Americans are spending more on the things they need, such as food and consumer goods, rather than on things they simply want, such as clothing and home furnishings. This is weighing on earnings, because general merchandise is more profitable than food, whose margin is as slim as a slice of wafer-thin ham.
Meanwhile, more markdowns are needed to shift the pile-up of products that cash-strapped shoppers aren’t buying. The situation hasn’t been helped by the fact that Walmart built up stocks amid the supply-chain snarl-ups of late last year.
Like rival Target Corp., Walmart is discounting its glut of inventory. While Walmart is making progress in clearing items such as home furnishings and electronics, more special offers are needed to entice shoppers to spend on clothing. Rather than the difficulties working themselves out relatively quickly — which Walmart predicted in May — the retailer is now expecting more pressure on its non-food business in the second half of the year. In one bright spot, however, the start of the back-to school spending season has been encouraging.
Nevertheless, all this is set to take its toll on second-quarter and full-year profit, with Walmart forecasting that adjusted earnings per share will fall as much as 13% in the current fiscal year. The shares fell as much as 10% in after-market trading.
The new wave of discounts could help counteract the effects of inflation. But any benefit to American consumers may have come too late. Amid higher prices for food and fuel, they are also missing those stimulus payments of 2021 and grappling with higher borrowing costs and the first signs that the jobs market is cooling.
If Walmart, with its low-price prowess and cost-cutting expertise, is suffering, the damage from more skittish shoppers will be even worse elsewhere. We’ve already seen Bath & Body Works Inc. cut forecasts. It is unlikely to be the last of Walmart’s less muscular rivals to do so this earnings season.
Walmart said in February that its customer base looked a lot like the US population. If that is the case, then its profit warning is a red flag not only for retail and hospitality companies, but for the engine of the US economy.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Andrea Felsted
