Walmart’s “Everyday Low Prices” Gets Burned By Inflation

Growth Peaks For Walmart, Shares Pull Back 

Walmart (NYSE: WMT) has been one of the few retailers who haven’t leaned into pricing to boost its results but that may be about to change. The company’s strategy helped it sustain YOY revenue growth but at a very tepid rate while bottom-line results were eroded by inflation. Based on the guidance, the company isn’t expecting much to change and we see downside risk in the numbers. The takeaway is that Walmart’s earnings are expected to decline this year and, at over 21X earnings and yielding only 1.51%, shares of the stock are going to move lower while investors rotate into cheaper, higher-yielding names. 

Walmart Moves Lower On Mixed Results, Weak Guidance 

Walmart didn’t have a terrible quarter but the results are not really inspiring. The company reported $141.6 billion in net revenue for a gain of 2.4% over last year and that includes a 500 basis point headwind from divestitures. The revenue also beat the Marketbeat.com consensus by 250 basis points but that is just about all the good news there is. On a comp basis, US sales are up 3% and 9% versus 2 years ago while eCommerce grew a more tepid 1% on top of a more robust 38% comp in the 2-year stack. Sam’s Club, a fundamental part of the Walmart growth story, saw its comps rise a stronger 10.2% YOY with a 10.5% increase in membership sales that we think is driven by value seekers. 

The margin and earnings are where the report gets really ugly. Both the gross and operating margins contracted due to product mix and supply chain issues. The mix is attributed both to the shift towards Sam’s Club and the product mix at Walmart that left the gross margin down 87 bps and the operating margin down a much larger 23%. The 23% decline in operating margin includes divestitures as well, but that is only a 440 bps impact and nowhere near offsetting the bottom line weakness. 

Turning to the guidance, the company is guiding for top-line growth in 2022 but that growth will peak in the current quarter at 5% and margins will continue to be pressured. The company is expecting flat to slightly higher EPS in Q2 but for the full-year results to come in negative. In our view, the company will either raise prices to save margin and possibly hurt volume sales or keep on as they are and watch earnings deteriorate under the pressures of inflation anyway. 

Beware Analyst Sentiment In Walmart Could Slip 

We haven’t seen any analyst commentary on Walmart yet but don’t imagine it will be good when it comes. Until then, the 24 analysts rating the stock view it as a weak Buy and fairly valued at levels just above the recent price action. The Marketbeat.com consensus price target has shown no significant movement over the last 90 days, either, but it is our opinion it will not be moving higher any time soon. 

The Technical Outlook: Walmart Falls 10%, Deeper Decline Possible 

Shares of Walmart fell 10% in the wake of the Q1 earnings and outlook and may fall further. The price action is currently at a key support level that may not hold up under the strain. The indicators confirm the sell signal and the break of the trend that occurred earlier in the year so we are not optimistic. A break of the $135 level could take the stock down to the $125 level or lower.