By Uday Sampath Kumar and Siddharth Cavale
(Reuters) -Walmart Inc reported a sharp drop in quarterly earnings and cut its full-year profit outlook on Tuesday as rising costs of fuel and labor hurt its bottom line while shoppers squeezed by decades-high inflation moved to buy lower-margin basics.
Shares of the retailer fell 8% in morning trading, its biggest one day percentage drop since March 2020, and dragged down shares of rivals, including Target Corp, which reports results on Wednesday.
Walmart, with its massive store footprint and leading position in domestic grocery sales, serves as a barometer for U.S. consumer sentiment and its earnings are closely watched by investors for hints about the health of the U.S. economy.
On Tuesday, the company reported a 3% rise in U.S. same-store sales, which came at the expense of margins as it strived to keep prices low while absorbing higher costs.
Gross margins fell 38 basis points in the three months ended April 30, three quarters of which reflected higher supply chain costs, the company said.
Operating expenses also rose by 45 basis points as a percentage of net sales due to elevated inventories and wage costs, the latter of which was exacerbated by a rapid return of employees from COVID leave leading to higher staffing.
Chief Executive Doug McMillon said the retailer’s quarterly profits “reflect the unusual environment”, at a time when U.S. inflation is at a nearly four-decade high.
While some consumers are being squeezed and are increasing spending on private-label brands and half gallons of milk, there are others that are spending on gaming consoles and other higher margin items, Walmart’s CFO, Brett Biggs said, indicating that inflation was impacting certain demographics differently.
U.S. retail sales grew 0.9% in April, aided by automotive sales and consumer visits to restaurants, despite fears of a recession, the Commerce Department said on Tuesday. April’s sales reflected both strong demand and higher prices, was in line with economists’ expectations.
Walmart executives on a post earnings call, however, warned that food prices continued to rise at double digit rates, indicating that consumers will be forced to shift more money away from discretionary spending to essentials like meat and dairy over the coming months.
Overall, Walmart’s net profit fell by a quarter to $2.05 billion in the quarter.
The Bentonville, Arkansas-based retailer is not alone in feeling the pressure of ballooning costs.
Rival Amazon.com Inc last month said it could post an operating loss of as much as $1 billion in the current quarter as it sinks more money into higher wages and to run its warehouses. Shares of the company, which also flagged overstaffing issues hurting productivity, have lost nearly a quarter of their value since then.
“Overall, Walmart is in a solid place,” Neil Saunders, managing director of GlobalData said.
“However, it is now entering a much leaner period where the absolute necessity of maintaining a low-price proposition will likely mean that profitability and margins come under increasing pressure.”
Walmart said it now expects fiscal 2023 earnings per share (EPS) to fall about 1%, rather than rise by mid-single digits seen earlier.
It also tempered its second-quarter expectations, with EPS now expected to be flat to up slightly, compared to a low to mid-single digit increase previously.
First-quarter earnings of $1.30 per share missed analysts’ average estimate by 18 cents. This marked Walmart’s first quarterly profit miss in five quarters.
Total revenue for the quarter rose 2.4% to $141.57 billion, which McMillon attributed to higher inflation that was causing average bills to rise up.
(Additional reporting by Arriana McLymore in New York; Editing by Sriraj Kalluvila and Tomasz Janowski)