Walmart Inc struck a cautious note in its economic outlook for 2023 on Tuesday as the retail bellwether forecast full-year earnings below estimates and warned that cautious spending by consumers could pressure profit margins.
Shares of the world's largest retailer fell 0.8% in early trading as the company continued to battle price-hikes from many of its product suppliers in a high-inflation environment.
Higher U.S. consumer prices, amid loftier costs for rental housing and food, have raised fears the U.S. Federal Reserve could further lift borrowing costs to cool domestic demand, leading to an economic downturn in the second half of the year.
"There's still a lot of trepidation and uncertainty with the economic outlook. Balance sheets are continuing to get thinner, savings rate is roughly half of what it was at a pre-pandemic level and we've not been in a situation like this where the Fed is raising at the rate that it does," Chief Financial Officer John David Rainey told Reuters.
"So, that makes us cautious on the economic outlook because we simply don't know what we don't know."
Walmart forecast earnings of $5.90 to $6.05 per share for the year through January 2024, below analysts' estimates of $6.50 per share, according to Refinitiv IBES data.
The forecast includes a 14-cent estimated impact from an accounting charge related to moderating inflation in key merchandise categories and reduced inventory levels at its Walmart U.S. and Sam's Club business, the company said.
Home Depot also forecast weaker-than-expected annual profits on Tuesday as soaring prices hit demand for home-improvement products.
On a post-earnings call, Walmart's Chief Executive Officer Doug McMillon said he expects "stubborn inflation" in dry grocery and items made for immediate consumption to have some "mixed" impact this year.
GAINING SHARE
Inflation-squeezed consumers are increasingly shifting toward buying more food and consumables from general merchandise, which Rainey said will continue to be a drag on margins this year. Toys, electronics, home and apparel remain soft spots, the company said.
This, however, is the type of environment that favors Walmart as a growing share of Americans feel the bite of inflation, CFRA analyst Arun Sundaram said.
"We're gaining share across income cohorts, including at the higher end which made up nearly half of the gains we saw in the U.S. again this quarter," McMillon said on the call.
"We're also capturing a greater share of wallet at Sam's Club in the U.S. with both mid- and higher-income shoppers," he added.
CFO Rainey said the company had gained both dollar and volume share from rivals in the fourth quarter.
"During the pandemic, retailers like Target benefited from a trade-up consumer mentality," said Landon Luxembourg, analyst at Third Bridge. "Now as shoppers become increasingly cost-conscious and trade down, Walmart is in just the right position to benefit."
Investors in Walmart, which operates more than 5,000 stores in the United States, have been keenly eyeing efforts to negotiate better prices from suppliers and ward off competition from rivals such as Target Corp, whose products are relatively pricier.
Rainey said the company recognized that suppliers were dealing with elevated costs. However, the company is using data and leveraging metrics, including best-performing merchandise and best-performing categories, in negotiations with suppliers to pass on lower prices to consumers, he said.
Companies, including Procter & Gamble and KitKat maker Nestle, have warned of further price hikes this year.
Walmart reported strong demand in the holiday quarter ended Jan. 31, posting total revenue of $164.05 billion, a 7.3% increase from last year. Analysts had estimated revenues of $159.76 billion. Comparable sales in the United States rose 8.3%, excluding fuel, helped in part by higher prices and e-commerce sales.
Adjusted earnings per share came in at $1.71 for the quarter, handily beating the $1.51 average expectation.
"Walmart has ended its year with a powerful set of numbers that show despite economic and competitive pressure, it remains the leader of the pack in retail," said Neil Saunders, GlobalData's managing director.
