Everyday Low Guidance: Walmart Delivers Another Reality Check

Is an anomaly anomalous if it happens twice in three months?

I don’t know. That’s a bit of a brain teaser. But markets will need to sort it out, because shares of Walmart, which fell the most since 1987 on May 17, fell the most since… well, since May 17, after “treating” investors to an egregious guide down after the bell on Monday.

“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart US is requiring more markdown dollars,” Doug McMillon said, adding that Walmart is “now anticipating more pressure on general merchandise in the back half.”

The shares plunged almost 8% in regular trading on Tuesday (figure below). They were down nearly 10% on Monday evening, following the profit warning.

Again, we’re compelled to ponder the oxymoronic prospect of a recurring anomaly.

To be fair, declines of this magnitude aren’t entirely unheard of (as the chart shows), but they don’t usually occur right on top of one another. It’s “Everyday low prices” not “Everyday low share prices.”

I assiduously avoid employing any iteration of the phrase “I told you so” unless it’s tongue-in-cheek. Pretensions to prescience annoy me more than they should for a variety of idiosyncratic reasons, but more generally, I ascribe to the idea that predictions about matters involving human behavior are mostly impossible. Because economics is really just bird watching, only with humans, the difference between being right and being wrong is the difference between being lucky or not.

That said, retailer guide downs in the current environment are as predictable as macroeconomic events can be. I wasn’t the first to flag the excess inventory problem. Nor was I close to being first. I was at least a month (and probably two) behind the first such warnings from top-down sell-side strategists, and I’m sure those calls were themselves late compared to the legions of macro watchers who spend their days looking for something to fret over.

However, once I picked up on the narrative, I was especially adamant about perpetuating it, not because I enjoy making people anxious, but because it was based on common sense and seemed virtually certain to play out. Retailers over-ordered, double-ordered and otherwise overcompensated last year, when fractured supply chains made it impossible to sate voracious demand for consumer goods. Inventory piled up (figure below), and when stimulus rolled off, goods demand started to fade. In (very) short order, inflation undercut discretionary purchases, forcing consumers to divert spending to necessities.

It was a recipe for markdowns and margin contraction. The best thing about the thesis was that it came with a fail-safe: If the economy didn’t slow, and consumers somehow managed to keep spending despite generationally high inflation, that spending would increasingly go towards services, not goods, as the combination of pent-up pandemic demand and “that summer feeling” compelled Americans to splurge on “experiences” instead of more “stuff.”

It was (and still is) an almost bulletproof macro call, and Walmart’s Monday evening forecast cut suggests it’ll be a fixture for the remainder of 2022, even if it gets priced in over the next six or so weeks (i.e., as we work through earnings from consumer goods companies and then retailers themselves). Walmart will report full-quarter results on August 16.

“Expectations for retail earnings were already somber, but it’s pretty clear the whole industry is headed for an ugly July-end reporting season,” Vital Knowledge founder Adam Crisafulli wrote.

Walmart now sees adjusted earnings falling as much as 13% this fiscal year. It was the second time in 2022 that Walmart cut its profit outlook. As late as February, the most important retailer on the planet not called “Amazon” still expected earnings to grow. The company said its operating margin will be “about” 4.2% for Q2 and between 3.8% and 3.9% for fiscal year 2023. “Comp sales for Walmart US, excluding fuel, are expected to be about 6% for the second quarter… higher than previously expected with a heavier mix of food and consumables, which is negatively affecting gross margin rate,” the press release said, on the way to suggesting Walmart is gaining share in grocery as customers attempt to “save money during this inflationary period.”

I should reiterate that Walmart’s scale and expertise in managing costs, logistics and supply chains means missteps are exceedingly rare. 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 like that seen on May 17 — and like what investors witnessed on Tuesday.

Relatedly, the read-through for the rest of the sector is dire. I don’t think that’s too much of an exaggeration. If Walmart can’t figure it out, nobody else can either. As one analyst put it, “when things go wrong at Walmart, you can extrapolate that it’s happening at other retailers as well.”

Monday’s guide down suggests Walmart still doesn’t have everything sorted out. These issues are ongoing, which is both surprising and not. Surprising in that there’s nothing Walmart can’t figure out in two months if the subject is brick-and-mortar retail. Not surprising in that if ever there was a year during which even Walmart won’t be up to the task of calibrating the business in real time to match rapidly evolving consumer behavior, it’s 2022.

On the bright side, McMillon said Walmart is “encouraged by the start we’re seeing on school supplies in [the] US.” You can always count on Trapper Keepers.