By Sam Boughedda
Aftermarket Monday, Walmart (NYSE:WMT) preannounced a lower profit outlook for the second quarter and fiscal 2023 primarily due to "pricing actions aimed to improve inventory levels."
The report has resulted in a more than 8% plunge for Walmart. However, analysts have warned the announcement may spell potential headwinds for Amazon (NASDAQ:AMZN) as well.
Speaking on Walmart, a Morgan Stanley analyst said the 11% cut to fiscal 2023 EPS (-16.5% vs. original guide) is another warning shot for retail and challenges their view of Walmart as a defensive safe haven. While maintaining an Overweight rating on the stock, they lowered their price target to $145 from $156.
In a separate note, another Morgan Stanley's analyst, who has an Overweight rating and $175 per share price target on Amazon, said Walmart's guide down is a potential warning signal for Amazon.
"As explained in Amazon and Walmart: Twins, the largest retailers continue to face similar opex, inflation, supply chain and consumer spending headwinds," wrote the analyst. "As such, we believe WMT's...profit guide down (and expectation for increased markdowns and general merchandise margin pressure in the 2H:22) raises risk around AMZN 1P merchandise margins. We have seen merchandise margin pressure drive lower than expected profitability before...as recently as 1Q:22, when higher inventory levels and inflation led to a ~$1.5bn lower than expected gross profit."
Meanwhile, a BofA analyst echoed that sentiment, explaining that the Walmart announcement suggests gross margin headwinds for Amazon.
"Walmart mgmt. noted progress on reducing inventory levels, managing supply chain costs, and reducing storage costs associated with shipping containers, but the inflation impact on consumers is outweighing these tailwinds. For Amazon, we would expect progress with supply chain and a logistics overbuild headwinds in 3Q, but some additional gross margin pressure driven by consumers trading down to less discretionary items, and possibly some 1P inventory clearing," said the analyst, who has a Buy rating and $168 price target on Amazon.
However, he explained that "Amazon could be less-exposed to inventory clearing and mix shift than WMT given a much higher 3P mix (56%E of units and 32%E of 3Q retail revenues) and a lower grocery/consumables mix, plus Prime Day in 3Q seemed like a successful 3P event."
"We think some mix shift to consumables is a likely 3Q headwind for Amazon. eCommerce comps ease the in 2H'22, and Amazon's retail margins are already depressed, and we think opportunities for logistics optimization to help unlock up to $70bn of 2023 profits from AWS, advertising, and 3P will support the stock," he added.
Amazon shares are down over 4% Tuesday.