Walmart defies gloom over inflation with sales and profit upgrade
By Jordyn Holman
Walmart this week reported a rise in sales in its latest quarter, signaling that consumers continued to spend despite high inflation and that the retail behemoth had moved past the operational missteps that plagued it earlier this year. It also increased its full-year forecast for revenue and profit, and projected confidence by announcing a $20 billion share buyback.
The retailer’s U.S. sales increased 8.2% in the third quarter versus the same period last year, comfortably beating analysts’ estimates. Revenue for the quarter rose to nearly $153 billion, also more than expected.
Walmart’s stock jumped 6.5% on Tuesday, its biggest one-day increase since 2020. Shares of other major retailers, like Amazon and Target, also rose.
Walmart said in August that its customers were feeling the effects of inflation and changing their shopping habits accordingly. Doug McMillon, the company’s CEO, said the retailer was adjusting to that reality. As the prices of food and gas increased, shoppers pulled back on discretionary spending for items such as clothes and knickknacks for the home. That left Walmart with excess inventory that it had to get rid of at a loss.
“We’re being thoughtful and balanced about inventory levels by category and expenses as we work through the fourth quarter and position ourselves for next year,” McMillon said Tuesday on a call with analysts.
At its stores in the U.S., Walmart said the overall number of transactions and the average amount a shopper spent per trip increased in the third quarter, suggesting that high inflation did not deter consumers as much as some had feared.
Walmart’s profit for the quarter was hit by a $3.1 billion settlement to resolve lawsuits over its pharmacies’ roles in the opioids crisis, an agreement that followed deals announced this month by CVS and Walgreens, which are still being negotiated.
Once a beneficiary of the pandemic spending boom, Walmart has more recently looked to reset Wall Street expectations, initially slashing its forecast for annual earnings, only to upgrade it in recent earnings reports. The relatively robust results in its latest quarter led Walmart’s executives to raise the company’s full-year profit outlook, saying they now expect profit to fall less sharply and revenue to rise more strongly than before. Executives said they had also improved their outlook because the retailer gained market share during the quarter as Americans looked for ways to save money.
Analysts are examining the earnings results closely because they signal how Walmart, the nation’s largest retailer, may fare in the crucial fourth quarter, when holiday shopping kicks into high gear. Analysts are expecting that retailers, which enjoyed bumper profits over the course of the pandemic, will see their margins shrink over the next couple of months, as the cost of labor, transportation and materials continues to rise.
Walmart is also a bellwether for the retail industry, providing a hint at what earnings might look like for Target, Macy’s and others that report this week.
Home Depot also reported on Tuesday that sales and profits last quarter were stronger than analysts expected, with higher prices offsetting a decline in transactions. It stuck with its forecast for modest earnings growth in the fourth quarter, and it expected comparable sales for the quarter to be the lowest it would have all year.
Analysts focused on how trends in the U.S. home market were affecting Home Depot’s business, much of which is tied to home improvement projects. The Federal Reserve’s actions to address inflation by raising interest rates have made it more expensive for Americans to borrow to buy homes.
“We have remained incredibly bullish. There are certainly factors outside of our control,” Ted Decker, Home Depot’s CEO, said Tuesday in a call with analysts. He added that he, like many others, was wrestling with the possibility that the Fed’s actions might take the United States into a recession and, if so, how deep it might be.
Americans are feeling more uncertain about the economy this holiday season than they did a year ago. In turn, Walmart, like other retailers, has been testing out ways to capture shoppers’ dollars earlier in the season, by pushing deals ahead of the usual timeline. It has also sweetened the perks for members of its subscription program, including the option to have returns picked up at their doorsteps. And it has lengthened the window for when all shoppers can return a purchase.
Strong food sales are a promising sign for how Walmart will perform during the fourth quarter, according to Neil Saunders, a retail analyst who is managing director of GlobalData. Despite rapid food inflation, Walmart did not raise prices on traditional Thanksgiving items; a turkey will be less than a dollar a pound, McMillon said.
“We expect this to be a major draw over the period,” Saunders said in an emailed statement. “Nonfood sales may struggle a bit, but our sense is the early start to discounting and promotion will help.”
Walmart is not immune to the shaky economic outlook, which led the retail giant to be more conservative in its approach to the holiday season. It said it would hire fewer seasonal workers this year. The uncertainty also factored into how executives were thinking about 2023.
“We know some of the unanticipated costs experienced this year shouldn’t repeat next year,” John David Rainey, Walmart’s chief financial officer, said on a call with analysts. “That said, we’re planning our business with the assumption that inflation continues somewhat elevated.”