August 16, 2022

Walmart Profit Warning Sees Shares Drop By 10%

On Monday, leading US retailer Walmart Inc. cut down its profit forecast, as customers reduced discretionary purchases due to a surge in prices of fuel and food. The company’s shares plunged 10% in after-hours trading.

Train wreck for retailers

The warning from Walmart turned out to be a train wreck for the retail sector, as shares of its competitors like Amazon.com and Target also plunged.

Walmart caters to shoppers who are cost-conscious and is considered a bellwether for the retail sector. The company said that its profit for the full year was expected to see declines between 11% and 13%.

The previous forecast had predicted a drop of 1%. In order to cut down on a spring backlog, the retailer said that there would be more aggressive price reductions in general merchandise and clothing, as compared to May.

The company stated that there would also be a 10% to 12% drop in the earnings per share for the full year, excluding divestitures.

Market analysts said that the warning was a reason to worry because it highlighted that all retailers were under pressure because of the price hikes.

Inventory issues

As prices of food and gasoline are rising, there has been a fall in demand for home goods, apparel, kitchenware, and appliances, leaving retailers with mountains of inventory.

At the end of April, data from the US Census Bureau showed that general merchandise stores had the highest inventories since the year 2000.

Problems have worsened because of demand miscalculations and snafus associated with the supply chain.

Walmart said in May that it had an inventory of about $60 billion at the end of the first quarter, due to which it decided to reduce prices aggressively on some items, such as apparel.

The company said on Monday that more price cuts would be done in order to reduce its inventories. Market analysts said that since Walmart caters to lower-income customers, it is vulnerable because these are the people suffering the brunt of inflation.

Retail sector troubles

Target, Walmart’s smaller competitor, had also trimmed its profit forecast in late May and June. The reduction happened twice within a couple of weeks.

This was because the retailer was struggling with inventories worth $15 billion and it also announced that it would take ‘necessary actions’, which included order cancellations and reductions in prices.

Both Target and Walmart have put pressure on their suppliers to absorb some of the higher costs. The CEO of Walmart, Doug McMillon, said that general merchandise would see more pressure in the second half of the year, due to lower customer spending in light of fuel and food inflation.

There is increasing evidence of a reduction in consumer spending. Later this week, an update is expected on the economic growth in the US, which may highlight a fall in output from April to June for the second consecutive quarter.

In order to curb inflation that has reached the highest in 40 years, the US Federal Reserve is raising the interest rates.

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