Walmart: What was the Message that Spooked the Markets?
The message that spooked markets from Walmart’s earnings is that inflation is starting to eat into companies’ profits. Walmart has a reputation for being careful about costs, but it was clearly struggling with a few core factors. If the Federal Reserve is having to hike interest rates, to control surging inflation, it risks slowing growth. If growth is already starting to slow, but inflation isn’t then the Fed’s interest rate hikes could end up sending the US into a recession. That’s the potted version. Here is some of the detail that worried investors around Walmart’s earnings.
Profit fell short of Wall Street’s expectations in its last earnings report in a one that was seen as ‘unexpected’. The EPS outlook was downgraded to a -1% decline. Profits are falling. The main problems for Walmart are higher wages, less profitable sales, and increased fuel costs.
Walmart ended up being overstaffed as it tried to cope with COVID and staff absences by hiring more workers. In the end, this resulted in overstaffing and a heavy wage bill.
Less profitable sales
Overall sales were up. However, the sales results showed less clothing and home furnishings than expected in a typically more profitable category for Walmart. Rising food costs were resulting in less disposable income for discretionary purchases.
Fuel costs rise
Surging energy costs also hit Walmart and it was unable to pass these costs on to consumers.
For Walmart itself, the share prices should recover as it is a more budget-end retailer. If the US does fall into a recession then expect shoppers from higher-end stores to move to Walmart. However, the key lesson to note is that inflationary pressures are biting. If these grow then stocks may fall as more and more companies announce it is harder to make a profit. That’s the message that Walmart sends: future profitability may be called into question during inflation.
About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.