Walmart results ease some recession fears

On July 25, Walmart warned about its earnings for the rest of the year, saying high fuel and food prices are pushing consumers to cut back on other spending, forcing the chain to cut prices on some non-essential goods, such as clothing, electronics and household items. The profit warning was seen as another sign of growing weakness for the economy in general.

But on Tuesday, the country’s largest retailer said it was getting a good response from customers to those price cuts last quarter. While Walmart continues to expect earnings to fall in the second half of the year, it is now forecasting a smaller drop in earnings than it previously expected. Earnings per share for the year are expected to fall 8% to 10% excluding divestments, but that’s better than the 10% to 12% drop forecast on July 25.

“We are pleased to see more customers choosing Walmart during this period of inflation,” said CEO Doug McMillon.

Since Walmart is the nation’s largest retailer, the results are seen not only as an indication of its own health, but also as a measure of the strength of the U.S. economy in general. Tuesday’s results were another sign that despite worrying indicators of a potential recession in the coming months, consumer spending remains strong. Walmart noted that it has had a strong back-to-school shopping season so far.
That’s likely due to continued strong job growth and rising wages – and it’s good news for the broader economy, as consumer spending accounts for nearly three-quarters of the country’s economic activity.

Shifts in purchases

McMillon said the need to lower prices for non-food items had helped to clear excess inventories, even if those price cuts and the shift in spending had weighed on profits.

“We expect inflation to continue to affect the choices families make, and we’re adjusting to that reality so we can help them more,” McMillon told analysts during a meeting with investors. “Regardless of the level of inflation and as we work through the places where we have excess inventory, we continue to make progress on our strategy.”

Walmart is partially positioned to take advantage when prices rise, as consumers are more likely to seek discounts from big box retailers. McMillon said Walmart had more middle- and higher-income customers as a result.

Not only does Walmart cut prices, it also cuts the goods it buys to put on its shelves.

“We also canceled billions of dollars in orders to align inventory levels with expected demand,” said CFO John David Rainey.

Sales in US stores that have been open for at least a year increased 3%, excluding fuel spending. Walmart said it expects similar growth in the second half of the year. Total sales increased by 9%, adjusted for changes in exchange rates.

Rapidly changing outlook

Even with the solid results, it’s hard to predict where the company’s sales and the US economy in general will be.

“The swings we’ve seen in consumer behavior have been hard to predict and the pace at which they’ve occurred has been high,” Rainey said.

And one of the things that is helping sales, and the company is doing better than it predicted last month, is the recent drop in gasoline prices, leaving customers with more money to spend on other items.

“If you told us that the fuel would continue to fall and that food inflation would decrease, it affects how we think about the general stock of trade,” McMillion said. “You don’t want to get into a defensive mode too much.”

Consumers also adjusted their food purchases, Rainey said, spending less on higher-end processed meats and more on canned tuna, hot dogs and chicken. Purchases of the company’s private label food brands also grew, with those brands growing twice as fast as Walmart saw in the first quarter.

Beat Profit Forecast

The mega-retailer managed to beat Wall Street earnings expectations, despite inflation and changes in consumer spending.

The company reported adjusted earnings per share of $1.77, just 1 cent lower than what it was earning on that basis a year earlier. Analysts polled by Refinitiv had forecast earnings to fall to $1.62 per share.

Shares of walmart (WMT) gained 6% in early trading on the news.

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