Walmart Warns It's In For A Tough Year

America's largest retailer Walmart warned on Monday that it faces a challenging year, cutting its profit guidance due to rising inflation and consumer retrenchment.

Food prices have reached double-digit levels, which is impacting customers' spending on general merchandise items. As a result, more markdowns are necessary to move inventory - particularly apparel - quickly.

1. The economy isn’t growing.

Data released by the Commerce Department indicates that economic activity was muted in the first quarter of this year. Gross domestic product contracted at an annualized rate of 1.4%, marking its first contraction since 2020's coronavirus-driven recession. This decline was attributed to lower spending among federal, state and local governments as well as a decline in exports.

Walmart's slowdown in the economy comes at an unwelcome time; they have become an indispensable part of U.S. consumers' shopping experiences over the past decade, serving customers through all economic cycles. But this is the first time in many years that their customers have been affected by a pandemic, altering their shopping patterns significantly.

Due to rising prices for gas, food and other essential items, shoppers were forced to reduce other non-essential purchases. As a result, Walmart has warned that its profit for the year could fall far short of analysts' predictions.

That is an enormous accomplishment for a company that accounts for more than 10% of retail sales in the U.S. and is also the biggest private employer in America.

On a recent earnings call, CEO Doug McMillon noted that as prices increased, customers began shopping less frequently at Walmart. This has caused the retailer's grocery business growth to slow down.

Conversely, the company has managed to gain market share in other categories like clothing and home goods. This has allowed it to ward off competition even as it had to reduce prices on some items in order to remain competitive.

Walmart still possesses too much inventory that it doesn't yet have enough demand for, as well as the seasonal shift that will see discounts on summer items in the coming months. These issues will continue to weigh on margins, with no signs of resolution in sight.

It also means the company may struggle to meet its operating margin target of 4.2% for Q2, down from the 9%-13% predicted last month. This represents a major setback for an online retailer whose profits have been driven down with lower costs and deep discounts on products which have given it significant scale and leverage to expand revenue.

2. The economy isn’t growing.

The economy remains weak, making it challenging for companies to expand revenue. Walmart - America's largest retailer - has particularly been hit hard by cost-cutting measures and a shift towards digital sales.

Walmart is now facing lower operating income for the second consecutive year, as its return on investment, a key indicator of profitability, declined. Furthermore, its earnings decreased to $13.6 billion in fiscal 2017 from $16.2 billion one year earlier.

Inflation is exerting pressure on consumers' spending. The government's consumer price index has increased 12% over the past 12 months, marking its biggest gain since 1981. With higher food and fuel costs, people are being forced to reduce non-essential purchases.

Walmart continues to experience strong customer spending despite the challenges. In its Q2 report, it reported that same-store sales at stores open for at least a year had increased 3% due to higher consumer demand and higher wages.

However, it warned that margin pressures would persist due to input costs such as labor and fuel. Furthermore, it said it is adjusting prices to account for these increases and inflation.

The company anticipates a slowdown in its e-commerce growth. Excluding divestitures, adjusted earnings per share are expected to decrease between 8%-9% for the quarter and 11%-13% for the full year.

Investors should take note of this warning, as it suggests Walmart's profits could come in far below expectations. If this proves true, then 2019 could prove to be a difficult year for both Walmart and its shareholders.

Although it will take some time for the company to recover from this slump, long-term investors should consider purchasing stock now as it could benefit from the current macroeconomic backdrop.

But if the economy decelerates into recession, Walmart could face significant hardship. That is why it is essential for investors to monitor market movements closely and ensure they do not make costly mistakes with their portfolios.

3. The economy isn’t growing.

Walmart's results are closely watched not only as an indicator of its own health, but also a gauge for how well the economy is doing overall. Tuesday's figures indicated consumer spending continues to expand despite potential warning signs about an impending recession in the months ahead.

But one major cause of the weak economy is that shoppers aren't spending as much. Instead, they prioritize necessities like food and gas while forgoing non-essentials like clothes or electronics.

Partly due to inflationary effects, but also due to a shift in Walmart customers. That presents Walmart with an obstacle, as they must win over an increasingly affluent new generation without discounts as an incentive.

Inflation has driven up prices of consumable items, putting additional pressure on Walmart's margins. Furthermore, its inventory is filled with items consumers no longer desire - making it difficult for the company to move merchandise from its warehouses.

One way to address the inventory issue is by cutting prices. While this might help boost sales of current stock, it won't likely generate enough business to boost profits significantly.

Another strategy is to cancel orders with suppliers. This is often employed by large retailers when they're having difficulty making ends meet.

Walmart faces a major challenge, however: consumer behavior changes that have hindered growth are unlikely to go away anytime soon. According to analysts, people are spending more on necessities like groceries and fuel while less on non-essentials like clothing or electronics.

Retail industry companies are feeling the brunt of this issue, with Wal-Mart warning of an impending downturn and Target recently cutting their outlook for 2019. With so much excess inventory on hand, large retailers like Target have had difficulty keeping up with demand. That's why Wal-Mart and Target have both issued cautionary statements about what lies ahead for their businesses this year.

As the economy worsens, suppliers may attempt to recoup some of their lost business by raising prices. That was Walmart CEO Doug McMillon's prediction during a speech to suppliers last month.

4. The economy isn’t growing.

The economy has been weak, despite some encouraging signs such as robust job growth. Consumer spending remains the backbone of the economy, accounting for 70% of GDP. Retailers like Walmart - responsible for about one-third of sales - are closely watched to assess the health of the economy.

The good news is that the economy isn't yet in recession, but it is feeling the effects of a slowing global growth rate and high inflation. Last week, government data revealed consumer prices rose 9.1% year-over-year in June.

This isn't necessarily a bad thing, as it means people are buying more of what they need and less of what they want. However, it poses an obstacle for companies - particularly those selling big-ticket items - to stay profitable.

Walmart, America's largest grocer, is no exception to this rule. On Monday the retailer warned of an adjusted profit decline for the second quarter of about 8%-9%, down from their prior estimate of flat to slightly increased profits.

In announcing its latest earnings, Chief Executive Doug McMillon acknowledged food inflation was pinching consumer budgets. To combat the issue, the company said it had responded by cutting prices across all departments from groceries to home goods.

He added that the company has also cancelled billions of dollars worth of orders to adjust inventories according to expected demand. While this may appear counterintuitive, it's actually a wise move in an economic downturn.

Furthermore, these price reductions have been rewarded with improved customer traffic and higher sales at its supercenters and smaller stores - even as the rest of the nation's economy continues to struggle.

Walmart is a smart business and understands that the best way to increase profits is by keeping costs under control. This includes employing cutting-edge technology in order to keep customers engaged and purchasing more. Furthermore, Walmart has collaborated with suppliers on new services like in-store money transfer.