• The San Juan Daily Star

Walmart profits drop, dragged down by higher costs for food and fuel

A Walmart store in Bayamon, Puerto Rico, on Jan. 8, 2022. In a financial statement, Walmart says it now expects its operating profits to fall 1 percent in 2022, revising a previous forecast.

By Michael Corkery

Walmart, the nation’s largest retailer, is being hit hard by inflation. The company reported earlier this week that its profit in the first three months of the year fell 25% from a year ago, an unexpectedly large drop that Walmart blamed on broadly higher costs, particularly in labor and fuel.

“Bottom line results were unexpected and reflect the unusual environment,” Walmart’s chief executive, Doug McMillon, said in a statement. “U.S. inflation levels, particularly in food and fuel, created more pressure on margin, mix and operating costs than we expected.”

The drop meant that for the first time in many years, Walmart did not meet Wall Street’s profit expectations, an ominous signal for other companies trying to navigate the current inflationary environment.

Walmart’s earnings of $1.30 per share in the quarter were lower than the $1.48 expected by many analysts. The company’s shares fell 11.4%, their worst day since the 1980s.

The rare profit decline shows how inflation, which is running at a 40-year high in the United States, is rattling even a giant company like Walmart, which typically can use its size and scale to lower the costs of the goods that it sells.

The company’s first-quarter results also provided insight into the changing habits of the American consumer. The company’s executives said they had begun to notice inflation shaping behavior. Lower-income shoppers were buying more food and less general merchandise, like clothing and sporting goods. And instead of buying brand-name bacon and items from the deli, they were opting for more of Walmart’s own “private label” brands, which tend to be less expensive.

For more-well-off consumers, sales of big-ticket items like video game consoles and patio furniture were still strong.

“There is a lot of uncertainty moving forward,” McMillon told analysts on a conference call Tuesday morning. “Things are very fluid.”

McMillon said Walmart was caught off guard by how quickly inflation rose in the past few months, particularly the cost of fuel, which affected its supply chain. The company also said that its labor costs were unusually high during the first three months of the year because it hired many replacement workers expecting that its core staff would be out sick with the omicron variant of the coronavirus. But many of those workers returned sooner than expected, creating overstaffing.

Asked by an analyst whether he had seen signs that inflation had hit its peak, McMillon said, “I am concerned that inflation may increase,” especially in food.

For the full year, Walmart now expects that the measure of profit that it forecasts for shareholders will fall 1% — a major shift in guidance from February, when the company projected that it would be able to grow profits by 3% this year.

Even as profit fell, Walmart managed to increase its global revenue, which rose 2.4% to $141.6 billion and was higher than expected. Sales in the United States were up 3%.

Going forward, the company expects sales to climb 4% this year, which is higher than the 3% increase it expected in February, a sign that consumer spending remains strong. Some companies, like PepsiCo, have reported jumps in revenue because consumers have continued to buy their products even after large price increases. But inflation has come on faster than expected, making it difficult for many businesses to recalibrate.

“We’re adjusting,” McMillon said in the statement. “And will balance the needs of our customers for value with the need to deliver profit growth for our future.”

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