Walmart’s Inflation Squeeze Isn’t All Bad

For Walmart,

WMT -11.28%

A retailer that strives for daily low prices, inflation turns out to be a double-edged sword.

On the other hand, price-sensitive consumers are exactly what Walmart needs to grow its business. America’s largest retailer on Tuesday reported good revenue, with comparable sales in the Walmart US business (excluding fuel) growing 3% in the quarter ended April 29 compared with a year earlier. Analysts polled by Visible Alpha had expected growth below 2%. Including Sam’s Club and its international business, Walmart’s total sales rose 2.6% in constant currency, beating Wall Street expectations.

However, the end result was worse than anyone expected. Net profit is half what Wall Street makes. In other words, the retailer generated 25% less profit last quarter than it did a year earlier on a higher revenue basis. Last quarter’s 3.8% operating profit margin marked the third straight consecutive decline in margins and was the lowest margin Walmart has seen in at least 30 years.

Shares of the retail giant fell 10% at midday Tuesday, giving them their biggest percentage drop since March 12, 2020, according to Market Data. Dow Jones.

Walmart was expected to manage supply chain issues and cost pressures better than smaller retailers. Some happened once that Walmart could not have foreseen. For example, Walmart’s higher-than-expected labor costs as associates left in the wake of the Omicron wave returned to work much faster than expected, resulting in a staffing redundancy. Since then, the company has been appropriately sized in terms of number of employees. And a fire consumed one of the largest fulfillment centers earlier in the quarter, adding to the strain and cost of their e-commerce fulfillment system. The retailer has redirected orders.

However, other pressures are likely to persist, including shifting sales to lower-margin grocers rather than general merchandise as shoppers feel pressure from inflation. broadcast. John Furner, chief executive officer of Walmart US, said price-sensitive customers are turning to private brands in categories such as deli, luncheon meats, bacon and dairy, said John Furner, director CEO of Walmart US, said during Tuesday’s earnings press conference.

But here’s the good news, and ultimately important news for Walmart in the long run: Demand for its groceries and merchandise is strong. The company said Walmart US gained market share in the grocery sector last quarter and raised sales guidance for the entire company this fiscal year. Currently, it expects revenue to grow by about 4% in constant currency terms. Three months ago, it was expected to increase 3%. But they expect earnings per share to fall about 1% this financial year, compared with the roughly 5% gain they had previously expected.

Falling profits can be interpreted as a worrying development, but investors with a longer-term view may see the recent sell-off as a buying opportunity. If rising costs are pressuring Walmart, it won’t spare its smaller rivals. And much of Walmart’s long-term growth plan relies heavily on smaller, fast-growing, high-margin businesses that will contribute to bottom-line profits as the company attracts more customers. These include Walmart GoLocal, a third-party logistics provider; fintech startup and its ad business. Its global advertising business grew 30% last quarter from a year earlier, while its new data monetization business grew 75% quarter-over-quarter.

Inflation is a bitter pill for Walmart shareholders, but it could make Walmart look healthier in the long run.

The line between Amazon and Walmart is becoming increasingly blurred, as the two companies seek to maintain their estimated $5 trillion retail market share while slashing each other’s share, often by Borrowing ideas from others. Photo: Amazon / Walmart

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