The retail sector has been under pressure over the past several months as investors digest the impact of rising inflation. This comes at a time when the Federal Reserve is also raising interest rates.
It’s for this reason, among others, Walmart (WMT) is expected to deliver a year-over-year decline in earnings on higher revenues when it reports second quarter fiscal 2022 earnings results before the opening bell Tuesday. With interest rates on the rise, combined with rising inflation, the fear is that consumers will spend less. How much impact will that have on Walmart’s guidance? Walmart has not been immune to higher input costs and supply chain disruptions.
Since the start of the year, the company has slashed its full year earnings guidance by a dollar. The result of the lower earnings estimates have impacted the stock price, which has fallen 20% from its 52-week highs of around $160. The stock is now down 11% over the past year, trailing the 7% decline in the S&P 500 index. Although rate hikes were not a surprise, investors are nonetheless weighing the potential impact on consumer spending, and perhaps worse, a recession.
Walmart’s hybrid model of brick-and-mortar retail and e-commerce has given it an advantage over its rivals. Having made consistent investments in technology and fulfillment, the current inflationary environment may play in Walmart’s favor given its low-price model as consumers shop to stretch their spending. Likewise, the investments the company has made in its e-commerce initiatives may also pay dividends. The company nonetheless on Tuesday will need to talk positively about these growth prospects and the macro impact on its customers.
In the three months that ended July, Wall Street expects Walmart to earn $1.60 per share on revenue of $149.78 billion. This compares to the year-ago quarter when earnings came to $1.78 per share on revenue of $139.87 billion. For the full year, ending January, Walmart’s earnings are projected to decline 10.9% year over year to $5.75 per share, while full-year revenue of $597.24 billion would rise 4.3% year over year.
The profit warning the company issued last month sent shockwaves to investors who are now likely wondering whether this warning was the last of the bad news. Just as important, the market also wants to know how the company’s grocery business is holding up amid the the current high inflation environment. Historically, the grocery business has been somewhat immune to changes in economic cycles, and has produced well among other categories.
In the first quarter, Grocery revenue came to $56.76 billion, accounting for near 60% of total Walmart’s revenue of $96.90 billion. The company, however, missed Q1 EPS which was not only its first miss in five quarters, but also just the third time in four years. The management noted that the miss was due to its customers spending on a higher mix of lower margin products such as food and spending less on higher margin general merchandise.
Because of this trend, the company implemented markdowns more aggressively than it wanted in order to move excess inventory, particularly in apparel, which hurt margins. Will this trend continue, particularly given the company’s most recent profit warning in July? Notably, this warning was two months after cutting it during its Q1 results. The market will also assess the company’s market share during the back-to-school shopping season which is often a potential catalyst to revive revenue.
On Tuesday, investors will want to see whether the company can revive its margins and combat the slowdown in spending and rising costs. Until all of this is known, the tepid revenue growth projection and the regression in the company’s profits will continue to pressure the stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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