Walmart shares suffered the biggest one-day drop since the eve of the Black Monday stock market crash after the company, cut its earnings guidance following a quarter in which it was wrongfooted by the rapid pace of inflation in the US.
The share price reaction, a particularly severe one by the standards of typically less volatile consumer staple stocks, came after the company revealed profits in its latest quarter had taken an “unexpected” hit owing to higher wages, a jump in fuel costs and softness in general merchandise sales at its US businesses.
As the world’s largest retailer, and long-regarded as a bellwether of the American consumer, Walmart’s commentary comes at a time when investors are scrambling to measure the impact of inflation, rising interest rates and supply chain snarls on the US economy.
“US inflation being this high and moving so quickly, both in food and general merchandise, is unusual,” said chief executive Doug McMillon. “We knew that we were up against stimulus dollars from last year, but the rate of inflation in food pulled more dollars away from [general merchandise] than we expected as customers needed to pay for the inflation in food.”
The company expects the higher staffing costs, affected by the winter wave of the coronavirus pandemic, to be isolated to the first quarter. McMillon said a “timing issue” with fuel costs, which accelerated in the quarter “faster than we were able to pass them through” and were $160mn higher in the US than the company had forecast, should be resolved by the end of the first half.
Issues around US inflation — at its highest level in 40 years and which the Biden administration has dubbed its “top economic priority” — are more likely to persist.
Walmart executives acknowledged more customers had switched towards cheaper private-label items, particularly in groceries, and away from branded goods. McMillon said inflation in food was running at a double-digit pace and he was “concerned that inflation may continue to increase”.
Helped by higher prices for some of its items and consumer demand that remains robust overall, Walmart said it expected net sales for its 2023 fiscal year to increase 4 per cent in constant-currency terms, up from the 3 per cent forecast it provided in February.
However, full-year earnings per share would now be down 1 per cent because of the unexpected costs that emerged in the first quarter, it said, having previously guided to a mid-single digit increase.
In the current quarter, Walmart said operating income and earnings per share would each be “flat to up slightly”, having previously forecast an increase in the low to mid-single digits.
The cuts to guidance caught investors off guard, given that Walmart had indicated three months ago it was continuing to navigate cost pressures and supply chain challenges.
Shares closed 11.4 per cent lower, handing the stock its biggest one-day drop since October 16 1987 — the session before the Black Monday crash — and its second-largest decline in the past 40 years.
Do-it-yourself retailer Home Depot was better able to cushion the blow from price pressures. Earlier on Tuesday, the company lifted its 2022 outlook after defying forecasts for a quarterly earnings decline. The company has encountered rising prices in many of its core commodity categories, such as lumber and copper, but chief executive Ted Decker said it was not entirely clear how inflation would affect consumer behaviour in the future.
“Inflation is definitely higher than we thought,” Decker said on an earnings call. “But our customers are resilient. We are not seeing the sensitivity to that level of inflation that we would have initially expected.”
Data on Tuesday suggested US consumers have continued to spend at a robust pace despite rampant inflation. Retail sales, which include spending on food and fuel, rose 0.9 per cent in April, according to the US Census Bureau, matching economists’ forecasts, while March’s increase was revised higher to 1.4 per cent.
The retail control group, which excludes building materials, motor vehicle parts and petrol station sales, rose 1 per cent, surpassing economists’ expectations for a 0.5 per cent increase. This was a slight moderation from March’s upwardly revised 1.1 per cent increase, after previously reporting a 0.1 per cent decline.
Walmart’s $141.6bn in first-quarter revenue cruised past Wall Street’s forecast for almost $139bn. Reported net income of $2.05bn in the first three months of this year was down from $2.73bn a year ago.