Walmart stock slips 11% after cutting profit forecast on rising costs

Posted: 17 May 2022 6:04 pm
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The nation’s largest retailer missed Q1 earnings estimates and lowered full-year earnings guidance because of rising inflation. What can investors expect moving forward?

Shares of Walmart (WMT) are sinking Tuesday after the company slashed its earnings guidance due to inflationary pressures and higher supply chain costs. The company is now forecasting a 1% decrease in earnings, compared to a single-digit increase forecasted in February.

The nation’s largest retailer is feeling pressure from inflation, especially in food and fuel. Inflation in the US is at its highest levels since 1982. Elevated labor costs, an unexpected influx in employees returning from COVID sick leave and high inventory levels weighed on the company in the first three months of the year.

Shares opened lower Tuesday on the disappointing earnings and sank as much as 11% by late afternoon.

Investors need to decide if Walmart stock, which is often seen as a “safer” stock during periods of high inflation, can increase profitability for investors while also taking care of its customers by keeping costs low.

What Walmart had to say

Walmart reported first-quarter fiscal year 2023 adjusted earnings of $1.30, falling well short of the $1.48 in per share earnings analysts were expecting, according to MarketBeat. In the quarter, Walmart’s net income fell to $2.05 billion, or $0.74 per share, from $2.73 billion, or $0.97 per share, a year ago.

Higher costs for labor and transportation are eroding Walmart’s profitability and forcing the company to decide how much of those costs it will pass along to consumers.

“Bottomline results were unexpected and reflect the unusual environment,” Walmart President and CEO Doug McMillon said in a statement Tuesday. “US inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected. We’re adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future.”

Walmart is also trying to work through its excess inventory after several quarters of aggressive buying to address global supply chain constraints. The company said during an earnings call with investors on Tuesday that it expects to work through its excess inventory over the next couple quarters.

Assuming higher supply chain costs and continued inflationary pressures, Walmart lowered its profit expectations for the year. Earnings per share will decrease by about 1% compared with the mid single-digit increase it previously expected, the company forecasted.

But the company raised its sales outlook for the year, saying it expects net sales to increase about 4% in constant currency. It previously anticipated a 3% increase. This comes as revenue for the quarter grew 2.4% year over year to $141.6 billion, topping Wall Street’s expectations of $138 billion.

Comparable store sales in the US grew 3% compared with the same period last year and 9% on a two-year basis. E-commerce sales grew 1% or 38% on a two-year basis. Meanwhile, Sam’s Club comp sales increased 10.2% or 17.4% on a two-year basis.

Thinking of buying Walmart stock?

Walmart stock is down around 18% from its 52-week high of $160.77, which it only reached last month. To compare, the Nasdaq Composite is down around 27% from its previous high. All considered, the stock has held up pretty well compared to the broader market amid the ongoing turmoil.

For a 5-year view of the performance of this stock, see the graph in our dedicated guide.

Despite Tuesday’s earnings miss and downward earnings guidance revision, the stock is often seen as a safe bet during periods of high inflation, since more people tend to prioritize value and buy in bulk. You’ll typically pay less per item, which helps when inflation corrodes your purchasing power.

Looking ahead, the stock has an average rating of Buy with a $166.47 price target, according to Yahoo Finance.

Deutsche Bank analyst Krisztina Katai on Monday ahead of Walmart’s earnings release maintained her buy rating on Walmart stock, but lowered her price target to $181 from $184, according to Benzinga.

JPMorgan analyst Christopher Horvers on Tuesday maintained his hold rating on the stock and $141 price target.

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At the time of publication, Matt Miczulski did not own shares of any equity mentioned in this story.

The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

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