By Siddharth Cavale
(Reuters) - Walmart (NYSE:WMT) Inc struck a cautious note in its economic outlook for 2023 on Tuesday as the retail bellwether forecast full-year earnings below estimates and warned that tight spending by consumers could pressure profit margins.
Higher U.S. consumer prices and loftier costs for rental housing and food have raised fears among executives that the U.S. Federal Reserve could further lift borrowing costs to cool domestic demand, leading to an economic downturn in the second half of the year.
Walmart forecast earnings of $5.90 to $6.05 per share for the year through January 2024, below analysts' estimates of $6.50 per share, according to Refinitiv IBES data, as the company continues to battle price hikes from many of its product suppliers.
"There's still a lot of trepidation and uncertainty with the economic outlook. Balance sheets are continuing to get thinner, savings rate is roughly half of what it was at a pre-pandemic level and we've not been in a situation like this where the Fed is raising at the rate that it does," Chief Financial Officer John David Rainey told Reuters.
"So, that makes us cautious on the economic outlook because we simply don't know what we don't know."
Shares of the world's largest retailer rose 0.4%.
The forecast includes a 14-cent estimated impact from an accounting charge related to moderating inflation in key merchandise categories and reduced inventory levels at its Walmart U.S. and Sam's Club business, the company said.
Home Depot (NYSE:HD) also forecast weaker-than-expected annual profits on Tuesday as soaring prices hit demand for home-improvement products.
On a post-earnings call, Walmart's Chief Executive Officer Doug McMillon said he expects "stubborn inflation" in dry grocery and items made for immediate consumption to have some "mixed" impact this year. In December, McMillon said he "did not like" that manufacturers wanted to embed more price hikes.
Walmart's margins are getting impacted because they are being very competitive with pricing, but they need to do that to get traffic in their stores, said Eric McNew, portfolio manager at Summit Global Investments.
"The consumer wants a deal. They want to save. They want the allure of savings and Walmart provides that," said McNew, whose firm holds about 350,000 Walmart shares.
GAINING SHARE
Inflation-squeezed consumers are increasingly shifting toward buying more food and consumables from general merchandise, which Rainey said will continue to be a drag on margins this year. Toys, electronics, home and apparel remain soft spots, the company said.
Still, investors and analysts both said that the type of environment that favors Walmart as a growing share of Americans feel the bite of inflation, CFRA analyst Arun Sundaram said.
"We're gaining share across income cohorts, including at the higher end which made up nearly half of the gains we saw in the U.S. again this quarter," McMillon said on the call, adding that it was also grabbing a greater share of the wallet at its Sam's Club unit.
Investors in Walmart, which operates more than 5,000 stores in the United States, have been keenly eyeing efforts to negotiate better prices from suppliers and ward off competition from rivals such as Target Corp (NYSE:TGT), whose products are relatively pricier.
Rainey said the company recognized that suppliers were dealing with elevated costs. However, the company is using data and leveraging metrics, including best-performing merchandise and best-performing categories, in negotiations with suppliers to pass on lower prices to consumers, he said. Graphic: Packaged food companies drastically hiked prices in 2022 https://www.reuters.com/graphics/CONSUMER-GOODS-PRICES/dwpkdexomvm/chart.png
Companies, including Procter & Gamble (NYSE:PG) and KitKat maker Nestle, have warned of further price hikes this year.
"I'm frustrated by pricing. I'm sure our customers are too. I'm sure consumers are too, but that's the environment that we're living in," Cheerios cereal maker General Mills (NYSE:GIS)' CEO said at a conference on Tuesday.
Walmart reported strong demand in the holiday quarter ended Jan. 31, posting total revenue of $164.05 billion, a 7.3% increase from last year. Adjusted earnings per share came in at $1.71 for the quarter, handily beating the $1.51 average expectation.
"Customers are still spending money," McMillon said.
"It's obviously not as clear what the back half of the year looks like," he added.