Walmart shares fall as higher costs, supply chain problems and inventories eat into profits

Walmart shares fall as higher costs, supply chain problems and inventories eat into profits

Walmart on Tuesday reported quarterly earnings that missed Wall Street’s expectations by a wide margin, as the nation’s largest retailer felt pressure from rising fuel costs and higher levels of inventory.

Shares were down about 9% early Tuesday.

Walmart is a much-watched company as investors and economists look for clues about how the American consumer is weathering inflation.

The discounter’s bottom line results for the quarter “were unexpected and reflect the unusual environment,” CEO Doug McMillon said in a release Tuesday morning. Inflation in the U.S. is at a nearly four-decade high. The consumer price index, a broad measure of prices for goods and services, increased 8.3% in April compared with a year ago, according to the Bureau of Labor Statistics.

The significant jump in fuel prices, elevated labor costs and aggressive inventory levels weighed on the company, Chief Financial Officer Brett Biggs told CNBC in an interview. He said some merchandise arrived late and other items, such as grills, plants and pool chemicals, didn’t sell due to “unseasonably cool weather in the U.S.” 

Plus, he said, Walmart employees returned from Covid leave quicker than expected and caused the company to become overstaffed during part of the quarter. He said those scheduling challenges have been resolved.

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The company raised its outlook for sales this year, saying it expects net sales to increase about 4% in constant currency for the full year. It previously anticipated a 3% increase. But Walmart also lowered profit expectations. Earnings per share for the year will decrease by about 1% compared with the mid single-digit increase it previously expected, the company projected.

Here’s what Walmart reported for the fiscal first quarter ended April 30, compared with Refinitiv consensus estimates:

  • Earnings per share: $1.30 adjusted vs. $1.48 expected
  • Revenue: $141.57 billion reported vs. $138.94 billion expected

In the quarter, Walmart’s net income fell to $2.05 billion, or 74 cents per share, from $2.73 billion, or 97 cents per share, a year ago. Excluding items, the company earned $1.30 per share. That’s lower than the $1.48 that analysts were expecting, according to Refinitiv.

Walmart’s adjusted earnings per share excludes gains and losses on the company’s equity investments and the incremental loss on its sale of U.K. and Japan operations during the first quarter of the previous fiscal year.

Total revenue rose to $141.57 billion from $138.31 billion a year earlier, above Wall Street’s expectations of $138.94 billion.

Same-store sales for Walmart U.S. grew 3% compared with the year-ago period or 9% on a two-year basis. E-commerce sales rose 1% or 38% on a two-year basis.

Walmart-owned warehouse club, Sam’s Club, saw same-store sales increase 10.2% year over year or 17.4% on a two-year basis.

Higher food sales, lower profits

Grocery, Walmart’s top sales category, is one of the company’s hard-hit categories. Food costs rose 9.4% in April on a 12-month basis, according to unadjusted data from the BLS.

As shoppers look for value, Walmart is gaining market share in grocery, Biggs said in an interview with CNBC. However, that has come at a price. Sales of food are pressuring profits, since the retailer is selling more low-margin items like eggs and bread and less higher-margin merchandise like apparel and electronics.

Elevated inventory levels and higher supply chain costs took a bite out of Walmart’s earnings, too, McMillon said on an earnings call.

Inventory increased about 33% as the retailer made aggressive buys to get ahead of inflation and make sure items stayed in stock. Some merchandise also arrived late or lingered in warehouses, especially seasonal items like landscaping supplies as spring weather was cold and rainy in much of the country.

To improve the mix of merchandise, McMillon said the company stepped up the number of rollbacks, or price markdowns, on apparel in the first quarter.

McMillon and Biggs said on the earnings call that they expect Walmart to sell through the higher inventory levels in the coming quarters, particularly as warm weather arrives and inspires shoppers to spring for patio furniture and new outfits.

Biggs told CNBC that the second quarter is “off to a good start from a sales perspective.”

Budget-strapped customers

Along with the drop in general merchandise sales, Walmart is seeing other signs some households feel budget strapped. The average ticket for customers in the U.S. rose 3% due to inflation, but the number of items in baskets has fallen, McMillon said on the earnings call.

Sales of half-gallons of milk and Walmart’s private brand of deli meat have jumped, Biggs told CNBC.

The discounter is trying to strike a balance between keep prices low, while not letting profits slip further, McMillon told analysts on the earnings call.

“Price leadership is especially important right now and one-stop shopping becomes more than just convenience when people are paying over $4 a gallon for fuel,” he said.

He said Walmart especially pays attention to “opening price-point food items” that low-income households must buy to feed their families, such as loaves of bread, gallons of milk, cans of tuna and mac and cheese.

“Given that stimulus checks happened last year, there was some benefit to some of those folks that is eroding overtime and as we look at the rest of the year, that’s something that’s on our mind,” he said.

Shares of Walmart closed Monday at $148.21. The stock has risen about 2.5% so far this year, outperforming the broader market as investors seek out consumer staples among economic uncertainty. The company’s market cap is nearly $408 billion.

Read the company’s earnings release here.