Walmart stock tumbles as supply chain snarls hit margins ahead of holidays

© Reuters. FILE PHOTO: Shoppers are seen wearing masks while shopping at a Walmart store in Bradford, Pennsylvania, U.S. July 20, 2020. REUTERS/Brendan McDermid/File Photo

By Richa Naidu and Aishwarya Venugopal

(Reuters) -Walmart Inc shares on Tuesday suffered their biggest intraday drop since May after high labor and supply chain costs ate into quarterly margins, even as the world's biggest retailer raised its annual sales and profit forecast.

Major retailers, including Amazon.com (NASDAQ:AMZN), have been struggling to bring products into the United States ahead of the peak shopping season due to shipping logjams, shuttered factories in parts of Asia and a scarcity of raw materials in recent months.

The hit to Walmart (NYSE:WMT)'s margins comes despite efforts by the retailer to limit disruption from supply chain shortages by chartering its own vessels to ship goods, ordering products into the United States well ahead of time and re-routing deliveries to less crowded ports.

Shares in Bentonville, Arkansas-based Walmart declined 2.5% after the company said gross margins for the third quarter declined 42 basis points (bps). The period includes October, when some consumers began early shopping for the all-important holidays. Walmart's tight margins could continue into the rest of the festive season, analysts said.

Supply chain issues or inflation could see Walmart down 10-30 basis points on its fourth-quarter gross margin rate in the United States, said Evercore's Greg Melich.

"The long period of sustained demand for goods has stretched supply chains, resulting in out of stocks and inflation," Walmart Chief Executive Doug McMillon said.

Walmart's results come weeks after rival ecommerce giant Amazon https://www.reuters.com/technology/amazons-holiday-quarter-forecast-disappoints-labor-supply-issues-mount-2021-10-28 reported an underwhelming fourth-quarter outlook and warned of higher costs during the holiday period.

Inflation and a labor shortage have rippled through America, forcing retailers to raise wages and hand out hefty bonuses. Walmart's McMillon said the retailer had hired over 200,000 new store and supply chain workers to tackle the holiday rush.

"They have a huge labor base and that pressured margins," Randy Hare, director of equity research at Huntington Private Bank, a Walmart investor. "If we start to see labor rates move up because of inflation, Walmart's one of the ones we wouldn't want to be around."

Walmart kept prices low to draw shoppers into stores in the third quarter. With more than 5,000 U.S. stores, the discounter's size and leverage with consumer product companies allow it to sell goods at lower prices, a key advantage when U.S. inflation is at a 30-year high.

HOLIDAY RUSH

Increased contributions from its advertising business helped offset some of the supply-chain pressure on margins, the company said. Retailers are aggressively chasing consumer brands' ad dollars, touting the wealth of their shopper data and prime media space on their websites and in stores.

Walmart said it expects full-year U.S. same-store sales to be more than 6% higher versus its prior forecast of a 5% to 6% rise, in anticipation of a surge in demand for toys and apparel during the holidays. Adjusted profit is expected to be around $6.40 per share, up from a previous range of $6.20 to $6.35.

In the third quarter, sales at U.S. stores open at least a year rose 9.2%, excluding fuel, benefiting from higher grocery demand and people buying more at stores. Analysts had estimated a gain of 7.04%, according to Refinitiv data.

Walmart's international business grew about 10% excluding the impact of currency fluctuations and divestitures, benefiting from strong sales in China and at India's Flipkart that got a big push from its promotional event ahead of the local festival of Diwali.

Total revenue grew by a better-than-expected 4.3% to $140.53 billion and on an adjusted basis it earned $1.45 per share, 5 cents above Wall Street expectations.