Walmart results ease some fears of recession

On July 25, Walmart warned of its profits for the rest of the year, saying high fuel and food prices were prompting consumers to cut other spending, forcing the chain to cut prices on some goods. non-essential, such as clothing, electronics and household items. The profit warning was seen as another sign of growing weakness in the economy as a whole.

But on Tuesday, the nation’s largest retailer said it got a good response from customers following those price cuts last quarter. Although Walmart continues to expect lower earnings in the second half of the year, it now expects lower earnings declines going forward than it had previously forecast. Earnings per share for the year are expected to fall 8% to 10%, excluding divestitures, but that’s better than the 10% to 12% decline forecast on July 25.

“We’re excited to see more customers choosing Walmart during this time of inflation,” CEO Doug McMillon said.

Since Walmart is the nation’s largest retailer, its results are seen not just as an indication of its own health, but a measure of the strength of the U.S. economy as a whole. Tuesday’s results were another sign that, despite worrying indicators of a possible recession in the coming months, consumer spending remains strong. Walmart noted that it is having a strong back-to-school shopping season so far.
That’s likely because of continued strong job growth and rising wages – and that’s good news for the broader economy, as consumer spending accounts for nearly three-quarters of the economic activity of the country.

Changes in purchases

McMillon said the need to cut prices for items other than food helped eliminate excess inventory, even though those price cuts and shifting spending put pressure on profits.

“We expect inflation to continue to influence the choices families make, and we’re adjusting to that reality so we can help them further,” McMillon told analysts on an investor call. “No matter the level of inflation and as we work into places where we have too much inventory, we continue to make progress on our strategy.”

Walmart is in part positioned to take advantage of higher prices, as consumers may be more likely to seek out discounts from big-box retailers. McMillon said Walmart got more business from middle- and upper-income shoppers as a result.

Walmart doesn’t just cut prices, it also cuts the products it buys to put on the shelves.

“We also canceled billions of dollars in orders to help bring inventory levels in line with expected demand,” Chief Financial Officer John David Rainey said.

Sales at its US stores open for at least a year rose 3%, excluding fuel expenses. Walmart said it expects to see that same rate of growth in the second half. Overall sales increased by 9% after adjusting for changes in exchange rates.

Rapidly changing prospects

Even with strong results, it’s hard to predict where the company’s sales and the U.S. economy as a whole are struggling.

“The swings we’ve seen in consumer behavior have been difficult to predict, and the pace at which they’ve occurred has been rapid,” Rainey said.

And one of the things that’s helping sales, and the company is doing better than it expected last month, is the recent drop in gas prices, which is leaving customers with more money to spend on d other items.

“If you told us that fuel was going to keep falling and food inflation was going to moderate, that’s influencing how we think about general merchandise inventory,” McMillion said. “You don’t want to get into defensive mode too much.”

Consumers also adjusted their food purchases, Rainey said, with less spending on higher-priced deli meats and more spending on canned tuna, hot dogs and chicken. Purchases of the company’s private label food brands also increased, with those brands growing twice as fast as Walmart in the first quarter.

Beat earnings forecasts

The mega-retailer managed to beat Wall Street earnings expectations, despite inflation and changes in consumer spending habits.

The company reported adjusted earnings per share of $1.77, down just 1 cent from what it had earned on that basis a year earlier. Analysts polled by Refinitiv had expected earnings to fall to $1.62 per share.

Shares of walmart (WMT) gained 6% in early trading on the news.

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