Walmart (WMT Stock): What was the message that spooked the markets?

The message that spooked markets from Walmart’s earnings is that inflation is starting to eat into companies’ profits. Walmart has a reputation for being careful about costs, but it was clearly struggling with a few core factors. If the Federal Reserve is having to hike interest rates, to control surging inflation, it risks slowing growth. If growth is already starting to slow, but inflation isn’t then the Fed’s interest rate hikes could end up sending the US into a recession. That’s the potted version. Here is some of the detail that worried investors around Walmart’s earnings.

Walmart worries

Profit fell short of Wall Street’s expectations in its last earnings report in a one that was seen as ‘unexpected’. The EPS outlook was downgraded to a -1% decline. Profits are falling. The main problems for Walmart are higher wages, less profitable sales, and increased fuel costs.

Wages

Walmart ended up being overstaffed as it tried to cope with COVID and staff absences by hiring more workers. In the end, this resulted in overstaffing and a heavy wage bill.

Less profitable sales

Overall sales were up. However, the sales results showed less clothing and home furnishings than expected in a typically more profitable category for Walmart. Rising food costs were resulting in less disposable income for discretionary purchases.

Fuel costs rise

Surging energy costs also hit Walmart and it was unable to pass these costs on to consumers.

For Walmart itself, the share prices should recover as it is a more budget-end retailer. If the US does fall into a recession then expect shoppers from higher-end stores to move to Walmart. However, the key lesson to note is that inflationary pressures are biting. If these grow then stocks may fall as more and more companies announce it is harder to make a profit. That’s the message that Walmart sends: future profitability may be called into question during inflation.

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