Walmart follows a simple corporate creed: Everyday low prices.
Other retailers purport to follow a version of the strategy, but Walmart exemplifies it. If something’s for sale at Walmart and it’s also for sale somewhere else, Walmart’s price will generally be lower. That may not be the case everywhere and always, but it’s the case almost everywhere and almost always, and you’ll waste more money and time trying to find exceptions than if you’d just bought whatever it was you were trying to buy at Walmart in the first place.
That reality is a function of Walmart’s scale and expertise in managing costs, logistics and supply chains. Missteps are rare. It’s Walmart.
The problem with businesses that run like clockwork come hell or high pandemic is that if something ever does go wrong, it’s conducive to incredulity which, in turn, can prompt anomalous share price declines.
On Tuesday, Walmart’s Q1 results came up short. Perhaps most notably, margins shrank on supply chain costs, precipitating a singularly bad selloff in the shares (figure below).
That’s a black swan, for lack of a better way to describe it. It was the worst one-day drop in at least 22 years.
Q1’s gross margin was 23.8%, well below the 24.5% consensus expected, and earnings missed the lowest estimate. The company now sees a full-year EPS decline. Walmart expects “a generally stable consumer in the US,” but warned of “higher supply chain costs” and “continued pressure from inflation.”
Doug McMillon described an “unusual” operating environment and said the company was surprised by the extent to which US inflation and higher prices for food and fuel weighed on the margin mix.
This is concerning on several fronts. First, Walmart is a defensive name. If you can’t depend on Walmart, it raises uncomfortable questions about the viability of consumer staples as a recession hedge. And thanks to the historic selloff in bonds, hedges are in short supply. Second, and more broadly, it doesn’t bode well when Walmart is surprised. As Morgan Stanley put it Tuesday, “clearly inflationary and cost pressures are accelerating, but we expected a retailer of Walmart’s size and scale to manage through these headwinds.”
Adam Crisafulli, of Vital Knowledge, echoed those sentiments. “One of the world’s largest and most sophisticated companies proved unable to escape the same corporate margin pressures hurting most firms,” he said, adding that “even the sales performance isn’t as good as it looks” given the contribution of food inflation against a double-digit decline in the discretionary merchandise category.
If there was a silver lining, it was strong sales for more expensive items, even as the juxtaposition with elevated demand for cheaper food seemed to underline the divergent fortunes of America’s bifurcated economy. There was also some evidence of overstaffing, but the company indicated that’s in the rearview.
Some suggested Home Depot’s results were an offset. I’m dubious. For one thing, the US housing market is due for a correction (data out Tuesday showed homebuilder sentiment sinking). But more importantly, Walmart and Sam’s Club are a better reflection of US households than Home Depot. The US economy lives and dies by Walmart shoppers (figuratively speaking), not by how many suburbanites are wandering around the cavernous aisles of home improvement stores.
Coming full circle, there’s a limit on Walmart’s capacity to pass along rising costs (including labor costs) to consumers. The company is the quintessential example of a self-referential economic reality I’ve described in these pages on countless occasions. Walmart is an analog for the entire US economy. When average people aren’t working at Walmart, they’re shopping at Walmart.
In order to offset the rising cost of low-wage labor, corporate America is raising prices to the low-wage laborers. In doing so, companies are ensuring they’ll have to raise wages again. The only way to solve that chicken-egg riddle is for management to absorb higher costs. That means margin compression and lower earnings. Everyday low prices can’t be high, after all.
“Price leadership is especially important right now,” McMillon emphasized, in remarks to analysts. The Walton family was on track to lose more than $16 billion Tuesday as a result of the stock wipeout.
Really great point about the importance of Walmart shoppers on the economy more broadly. I agree this seems pretty dire.
We’ll need to watch the sales numbers from the “dollar stores”. I recall that they benefited in 2009.
This economic slowdown will be a very bright spotlight on the inequality gap that Mr. H. has discussed on countless occasions over the past couple of years.
Walmart is NOT the lowest price on all goods. They pioneered having the lowest price on the lowest cost merchandise in a category. For example Walmart will be the lowest price on a cheaper television. But if you climb up the ladder to a more expensive brand and category within TVs, Walmart will be MORE expensive most likely. Brilliant strategy and it has paid handsome dividends for the company and its shareholders. Walmart also pioneered handing out applications for food stamps and government programs to its workers when they start to work for the company- maybe that’s better now that low wage workers are in shortage and wage rates are up- nevertheless an ugly practice. And then of course complain about its corporate taxes. But they do squeeze suppliers on cost. God help you if you supply Walmart- you are not going to work for a large profit in the longer term. If Walmart is getting squeezed, you know their business model is under pressure- and yes if they are under the gun, many other companies are going to be as well.
H-Man, Walmart is the average Joe and when that Joe retreats, hang on. A true canary in the coal mine.
They were caught flat footed. A few months ago they were asking suppliers to eat into their margins to gain market share. They were assuming inflation would be transitory.
Walmart says it’s about low prices but it’s really about stable gross margins. Over the last 25-30 years its GMs have varied but when I last looked from one year to the next the change rarely, if ever, exceeds 1ppt. What ever happens to their costs they make price and merchandising adjustments to keep their margins as steady as they can. And unlike Sears that failed, in part because it sought to manage everything from Chicago, Walmart manages margins locally. A few years ago I read a case study concerning prices. The author created a basic grocery list and bought his list at a Walmart in Houston for something like $160~ The author then took the same list to a Walmart in Boston and had to pay $220~ to buy it. Walmart makes sure its prices are competitive locally, checking competitors every day. But it’s the margin maintenance they really seek. A 17% decline in the stock is not really merited on the current miss. I’m adding at these prices.