Walmart on Monday cut its quarterly and full-year profit guidance, saying inflation is causing shoppers to spend more on necessities like food and less on items like clothing and electronics.
This shift in spending has left more items on store shelves and in warehouses — forcing the retailer to aggressively mark down items customers don’t want.
The company’s shares fell in after-hours markets following the announcement. Shares of other retailers, including Target and e-commerce giant Amazon, also fell.
Walmart said it now expects adjusted earnings per share for the second quarter and full year to fall about 8% to 9% and 11% to 13%, respectively. It had previously expected them to be flat on slight growth for the second quarter and a decline of around 1% for the full year.
Inflation has risen at the fastest pace in four decades. As consumers face higher prices at the gas pump, grocery stores and restaurants, some consumers are choosing where to spend money and where to retire. In some cases, they’re prioritizing experiences they’ve missed during the pandemic — such as splurging on vacations or dining at a restaurant.
Walmart, which is the largest U.S. grocer and is often seen as a drag on the overall economy, said more customers are turning to its stores, which are known for low prices, to fill pantries and refrigerators. Theirs. But they are passing up the general goods they can live without.
Walmart said it now expects U.S. same-store sales to rise about 6% in the second quarter, excluding fuel, as customers buy more food at its stores. That’s higher than the 4% to 5% growth the company previously expected.
However, this mix of goods will weigh on the company. Food products have lower profit margins than discretionary items such as televisions and clothing.
“Rising levels of food and fuel inflation are affecting the way consumers spend, and while we’ve made good progress in cleaning up hard-line categories, apparel at Walmart US is taking more discount dollars,” said CEO Doug McMillon in a press release.
He said the company is seeing strong back-to-school sales in the US, but expects people to pull back from buying general merchandise in the second half of the year. This could be a warning sign for retailers ahead of the holiday shopping season.
The sharp shift in consumer spending could jeopardize other aspects of Walmart’s strategy as well. The company wants to grow its subscription service, Walmart+, but that could be a tougher sell if Americans clean up their bills to cut fees. It has launched a growing number of general merchandise brands, particularly in apparel and home, which can now be locked on the clearance rack.
However, McMillon has said that Walmart can gain market share and more customers’ wallets during the inflationary period by emphasizing good value. Over the past several quarters, he has emphasized that the discount will keep prices low.
Target also lowered its forecast for the second quarter. Last month, the retailer said its profit margins would be hit as it canceled orders and marked down merchandise. The company largely attributed the revised forecast to an excess stock of goods, including many heavy items such as small home appliances that saw a drop in demand.
Walmart shares fell more than 9% after hours. The target was reduced by more than 6%. Amazon fell more than 3%. Macy’s, Kohl’s and Nordstrom each fell more than 3% after hours, as investors sought to exit stocks that sell mostly apparel and home goods. The gap fell by about 2%.
Walmart will report fiscal second quarter results on August 16.
Read Walmart’s full release here.
— CNBC’s Lauren Thomas contributed to this report.
