Just weeks before it is due to release its Q2 earnings on Aug 16, Walmart shocked markets after the close when it slashed its profit outlook for Q2 and FY2023.
That is going to leave a mark on my portfolio tomorrow morning. Q1 wasn’t very spiffy either.
Thing is, WalMart caters to a lower income bracket than some other retailers. Is that lower strata running out of money, or open to buy on their credit card, in spite of the pressure on “JCs” to give them a raise?
It’s fun to parse these pieces:
Walmart provided a business update today and revised its outlook for profit for the second-quarter and full-year, primarily due to pricing actions aimed to improve inventory levels at Walmart and Sam’s Club in the U.S. and mix of sales.
Comp sales for Walmart U.S., excluding fuel, are expected to be about 6% for the second quarter. This is higher than previously expected with a heavier mix of food and consumables, which is negatively affecting gross margin rate. Food inflation is double digits and higher than at the end of Q1.
So, food is higher in cost and therefor its sales are comprising a higher proportion of all sales, but the margin on food is lower than the average item Walmart sells. Assuming that purchases from Walmart are a zero sum game, this would be bad news, but I suspect the purchasers still buy the same goods, but their proportion nominal sales mix is reducing Walmart’s average profit margin. Not a show stopper as far as I’m concerned.
This is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel.
OK, so here is where that zero sum thing kicks in and they are saying they have to discount items, other than food, in order to move them.
During the quarter, the company made progress reducing inventory, managing prices to reflect certain supply chain costs and inflation, and reducing storage costs associated with a backlog of shipping containers. Customers are choosing Walmart to save money during this inflationary period, and this is reflected in the company’s continued market share gains in grocery.
This statement says how well they did in increasing their food sales market share by reducing prices in an effort to have their cake and eat it too.
So, bottom line is that they have cut prices across the board to increase market share and the math involved has caused their P/L statement to reflect a lower overall profit margin because of the increasing portion of sales made up of food items.
Agreed. The calls by Walmart for discounting…as dad used to say, “they mark it up before they mark it down”.
The sticking point is demand might be down on apparel. Would it really surprise us? Things are not rosy right now for the working poor.
Things are not rosy right now for the working poor.
Only on a relative basis. The only time that I can remember “the working poor” not being poor was when they were receiving the government’s COVID handouts to keep them afloat when they were the unemployed poor. That gave them the ability to (if they were too naïve to save) buy above their financial strata for a couple of years.
We have had the great reset and they are poor once more - with all the problems that entails; like maxed out credit cards, cutting on purchases, etc. The challenge for our nation is to help rationalize the experience they had when money was flowing in. I’m not complaining about keeping pockets filled with cash during the great shutdown, but we shouldn’t be surprised that they are now acting as if they are poor again - because they are.
And, as Amazon cuts back on their deliver logistics system and Walmart notices less people buying clothing, we shouldn’t be surprised, but should rather plan on re-pricing business back to pre-pandemic levels. Things are rarely rosy for the working poor. While I have no problem paying them more, it is important to realize that the ability to buy is either a zero sum game - making those payments a tax across all who buy products and services or, if not, potentially highly inflationary (which would simply take the purchasing power back again - leaving them working poor with more bucks that are worth less each).