Walmart is “seeing more middle- and high-income shoppers,” CEO Doug McMillon said Tuesday.
It was an incisive macro assessment. The well-to-do are apparently discovering the many wonders of the world’s largest brick-and-mortar retailer. The rich are reaping the rewards of everyday low prices. You can smell the savings. Or maybe that’s the distinctive scent of cheap apparel mixed with the unmistakable odor of the auto parts and car accessory aisles.
In a relief for markets nervously eying a deluge of incoming earnings reports from the biggest names in retail, Walmart managed to beat estimates with quarterly results out Tuesday.
Of course, the bar was low. Walmart stunned investors with another profit warning late last month, citing expected pressure on general merchandise in the second half and markdowns in apparel. In its Q1 report, Walmart validated the concerns of some top-down equity strategists on Wall Street, when the retailer cited elevated supply chain costs and ongoing pressure from inflation in reporting margins that missed estimates. Subsequently, a number of retailers, including Target, flagged similar headwinds. Soon enough, the “too much stuff” story (i.e., the reality of excess inventories) was a fixture of the financial news cycle.
On Tuesday, Walmart said it’s canceled “billions of dollars” in orders “to help align inventory levels with expected demand.” Efforts to improve inventory levels in the US, alongside gains in grocery share, pressured margins in the second quarter, a trend management expects to continue for the balance of the year.
That said, the outlook appeared to stabilize. Thanks to a better-than-expected performance in Q2, forecasted adjusted operating income (and adjusted EPS) is now seen declining 9% to 11% for the fiscal year. In its profit warning last month, Walmart said adjusted earnings might fall as much as 13%. Sales will grow 5% in Q3 and 4.5% for the full year. The currency headwind is seen at $1.3 billion in Q3 and $2.1 billion over the second half.
Adjusted EPS for Q2 was $1.77, better than the $1.63 consensus expected. Comps for Walmart-only US stores excluding gas rose 6.5%, better than the company flagged last month, and ahead of estimates, although I’d note (again) that to the extent gains in grocery share contributed to the beat, the implied heavier sales mix to food is a headwind for margins. Total US comps ex-gas rose 7%, also better than expected. Walmart maintained its comps guidance. Revenue was $152.86 billion, up 8.4% YoY. Consensus saw $151.14 billion. On a constant currency basis, sales rose more than 9%.
In a possible nod to the idea that US corporates think stocks have overshot to the downside, Walmart also said it spent $3.3 billion on repurchases this quarter, the most in 10 years. Buybacks should total $11 billion for this fiscal year.
At the margins (no pun intended), Walmart’s results were good news. It could’ve been worse. The cynical among you might suggest that no, in fact, it couldn’t have been worse — that Walmart deliberately tipped the worst-case scenario three weeks ago in order to ensure they could clear a twice-lowered bar.
I’d countenance that interpretation with one rejoinder: Walmart was caught badly offside this year. It’s plainly not the case that management is able to preemptively quantify all of the downside risks. So, yes, it could’ve been worse. If 2022 has shown us anything, it’s that already bad situations can get worse in a hurry. It’s thus notable that Walmart’s forecasts not only stabilized, but improved.
Still, management’s commentary reflected all the challenges that investors have come to identify with being a retailer in 2022. Walmart expects new price cuts on some goods in an effort to clear out more inventory. Management said it’s imperative that home goods and electronics inventories are whittled down. Shares of Vizio dropped sharply in response.
In its Q2 deck, Walmart cited “softness” in discretionary categories last quarter, with particular weakness in electronics, apparel and home products. On the bright side, sales were “solid” in lawn & garden. Back-to-school categories were likewise a semblance of buoyant, and automotive was decent.
Welcome to Walmart, middle- and high-income shopper. Feel the savings. You’ll love the smell of new tires, crisp Dickies, Miracle Gro and potting soil in the morning.
I am surprised (positively) that general merch comps were +MSD. In my opinion, WMT’s report was bad (negative real sales growth and -LDD earnings decline) and 3Q might be worse, but if this is more-or-less “as bad as it gets” then the case for “just-a-mild-recession” gets better. HD report was better, as expected.