Retail stocks slip as Walmart dives on profit warning

Walmart and other retail stocks fell sharply on Tuesday, a day after the Dow Jones discount giant cut its earnings outlook amid efforts to cut prices and clear clothing and other unsold products from shelves.

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The move came as customers recalibrated their budgets to absorb decades of high inflation. As customers shift more spending toward covering rising grocery prices, Walmart said it expected a tougher stretch for the general merchandise segment for the rest of the year.

However, the big-box retailer raised its sales forecasts, citing the “heavier mix” of food and consumer goods. Some analysts lowered their price targets. But others said Walmart was better insulated than others from rising prices.

Walmart stock fell 8% on the stock market today, falling below its 50-day mark.

Among other retail stocks, Goal (TGT) fell 3.7%. Best buy (BBY) slipped 3.5%. Dollar tree (DLTR) and Dollar General (DG) fell 4% and 2% respectively.

Walmart goes after retail stocks

The forecast comes after shares of Walmart, Target and other retail stocks slumped in May on concerns about the retailers’ ability to manage costs and inventory. There were some signs that consumers were beginning to search for some cheaper foods. Target, meanwhile, was stuck with things like TVs that it couldn’t sell.

Walmart said it expected full-year adjusted earnings per share to fall 11% to 13%, compared with a forecast in May of a drop of about 1%.

For the second quarter, the big box retailer predicted a decline of 8%-9% in earnings per share. In May, Walmart said it expected earnings per share to be “flat to slightly up.”

Earnings per share forecasts for May were already lowered from the outlook offered in February.

The company, in revising its forecasts, cited “price actions aimed at improving inventory levels at Walmart and Sam’s Club in the US”

“Food inflation is in the double digits and higher than at the end of Q1. This affects customers’ ability to spend on general merchandise categories and requires more markdowns to move through inventory, particularly apparel,” Walmart said in a statement.

Progress on inventory, storage costs

“During the quarter, the company made progress in reducing inventory, managing pricing to reflect certain supply chain costs and inflation, and reducing storage costs associated with a shipping container backlog,” the chain said. All are issues that have hung over retail this year.

“The rising levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress in removing strict categories, apparel at Walmart USA requires more downward adjustment dollars,” CEO Doug McMillon said in a statement.

“We now expect more pressure on general merchandise in the back half, but we are encouraged by the start we are seeing in school supplies at Walmart US,” he added.

Walmart said it expected second-quarter net sales growth of about 7.5%. That was better than a forecast in May for an increase of “above 5%”. For the full year, Walmart said it expected about 4.5% net sales growth, compared with expectations of about 4% given in May.

Walmart is scheduled to report earnings on August 16.

Analysts on Walmart stock

BofA analysts in a research note on Monday maintained their buy rating on Walmart stock, saying they had lower exposure to discretionary spending categories. They said general merchandise made up about 32% of Walmart’s sales last year, compared with more than half at rival Target.

They also said that Walmart had “meaningfully (and most consistently)” outperformed the S&P 500 in the last five recessions, holding up during other periods of rising prices.

BMO analyst Kelly Bania said in a note on Monday that Walmart’s forecast “may give the all clear” on the stock.

However, Oppenheimer’s analysts remained cautious.

“With two consecutive guide-downs, WMT is now clearly a show-me
history, and we see limited upside” in the short term, they said.

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