What to Expect with Walmart Earnings after Margin Compression Warning

The world’s largest retailer Wal-Mart on Tuesday report before the bell. WMT warned on margin compression and soaring dollar lowering forward guidance in late July. Investors will be looking for which products are still attracting consumer spending with the impact of inflation. Walmart in Q1 saw its earnings hit by high prices forcing customers to choose purchases of food and other staples over higher margin, discretionary items. This has likely seen with more markdowns to move overstock inventory in some areas.

Walmart Family Guy

Earnings Preview

Following a big miss in the first quarter and then a warning on July 25 the market is watching whether that guidance has caught up to the forthcoming report. The majority of analyst are bullish and investors hopeful given the rebound in the stock market off lows.

Expectations for WMT second quarter of fiscal 2023:

  • Adjusted EPS of $1.60, up 23.1% sequentially and down 10.1% year over year.
  • For the full fiscal year ending in January, analysts forecast EPS of $5.75, down 11%, on sales of $593.60 billion, up about 4.6%.
  • Expected to report sales of $149.78 billion, up 6.8% sequentially and down about 7.1% year over year.

The numbers

  • Walmart stock trades at 22.6 times expected 2023 EPS, 20.0 times estimated 2024 earnings of $6.51 and 18.4 times estimated 2025 earnings of $7.10 per share.
  • WMT’s 52-week range is $117.27 to $160.77.
  • Walmart annual dividend is $2.24 (yield of 1.47%).
  • Total shareholders return for the past year was negative 11.1%.

What to watch for:

  • One thing to watch in future earnings is the number of customers switching to Walmart to save money during this inflationary period, which is leading to market share gains in groceries.
  • Management will likely field questions on plans to diversify the business after a New York Times report that Walmart held talks with several streaming companies over a possible partnership. 
  • Reuters reported Thursday, “there are no signs shoppers are returning to the nation’s biggest retailer.” July data indicated that foot traffic in Walmart’s U.S. stores declined by 2.7%.

July 25 Profit Warning

Walmart gave a profit warning on July 25 which sent $WMT down 9% and dragged down a bunch of retailers after the company after it lowered its profit outlook for Q2 and the full year.

What shocked the market was it wasn’t long after Walmart delivered worse than expected first-quarter earnings and cut its full-year profit forecast, as surging costs cut into the bottom line of the world’s biggest retailer. WMT said it sees earnings falling by around 1%, compared to a prior forecast of a 5% to 6% increase. The stock was down 7% Premarket on that.

“Bottomline results were unexpected and reflect the unusual environment. U.S. inflation levels, particularly in food and fuel,” said CEO Doug McMillon.

At the same time WMT raised its US comp (ex-fuel) guidance for Q2 (July) to be around +6%, up from prior guidance of +4-5%. The guidance for total sales for both periods is above analyst expectations. There is the catch that is due to food inflation rising double digits.

WMT lowered EPS guidance is due to margin compression. WMT expects higher sales, but it also expects a heavier mix of food and consumables, which hurts gross margin. Higher food prices are hurting consumers’ ability to spend on general merchandise. The flow on is inventory is getting heavy and WMT is planning more markdowns to move product, particularly apparel. WMT expects Q2 operating margin of just 4.2% and 3.8-3.9% for FY23.

This was not surprising as it followed that Target (TGT) similarly guiding margins lower as did Ross Stores (ROST) for Q2. Rising inflation has caused a reduction in discretionary spending, leading to bloated inventories and retailers forced to mark down prices.


Walmart Q1 Earnings Recap

Walmart Inc NYSE: WMT: Reported Earnings Before Open Tuesday

 $1.30 Missed $1.48 EPS and $141.57B Missed $139.09 billion forecast in revenue 

Earnings

  • Revenue: $141.57 billion vs. $139.09 billion expected, $138.31 billion Y/Y
  • Adjusted earnings per share: $1.30 vs. $1.48 expected, $1.69 Y/Y
  • Total U.S. comparable sales, excluding gas: +4% vs. +2.26% expected, +6.2% Y/Y 

Walmart Inc NYSE: WMT

Market Reaction – 137.80 -10.41 (-7.02%) Premarket

Highlights

“Bottom-line results were unexpected and reflect the unusual environment,” Walmart’s president and CEO, McMillion said in a press statement. “U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected. We’re adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future.”

Walmart’s operating expenses as a percentage of net sales also increased by 45 basis points during the quarter, “primarily due to increased wage costs in Walmart U.S.,” the company added.

General merchandise comparable sales grew by just low double-digits on a year-over-year basis during the first quarter, with Walmart noting “softness in discretionary categories” came as the company “lapped strong sales last year due to stimulus spending.”

Grocery comparable sales were also up by low double-digits, though Walmart said it continued to see market share gains in the category over last year.

Source: Walmart, Alphastreet

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