Retail giant Walmart, despite supply chain disruptions and inflation slicing into its first-quarter profits, posted a 3% rise in comparable sales at its U.S. stores and boosted revenue estimates for the rest of the year.
The Bentonville, Arkansas-based company outlined for analysts on Tuesday issues it struggled with in the first three months of the year, which included absorbing inflation-spurred price increases it didn't want to pass on to shoppers. On the distribution side, its woes included scrambling when one of its biggest fulfillment centers, a 1.2 million-square-foot warehouse at 9590 Allpoints Parkway in Plainfield, Indiana, was devastated by a fire in March and remains closed. That property is owned by Duke Realty, the industrial real estate investment trust based in Indianapolis.
Walmart, the biggest U.S. retailer, said its nationwide comparable-stores sales increase, and a 2.4% climb in total revenue to $141.6 billion, was led by strength in the grocery sector. CEO Doug McMillon said Walmart shoppers, apparently penny-pinching with inflation high, are switching from name brands to private-label foods in categories such as deli, lunchmeat and dairy. And they bought less general merchandise while spending on food, cutting into Walmart's margins.
Because of its size, Walmart is closely watched by retailers and landlords as a bellwether for how consumers are behaving in response to national and global trends, including the record inflation rate that the United States is experiencing. Walmart announced its results the same day the federal government reported that U.S. retail sales were up nearly 1% in April versus March.
"We had a good quarter from a top-line point of view," McMillon said of revenue. "Sales for the period were ahead of what we expected across all segments and we're pleased with the momentum we see so far in Q2. The bottom line was below our expectations due primarily to three areas that negatively affected operating income in our U.S. businesses, both in Walmart and Sam's Club. Each of these items represents about a third of our overall profit miss."
Those areas included: overstaffing as workers out on COVID leave came back to work faster than expected; high inventory and a higher cost for containers and storage; and fuel costs related to its supply chain running over $160 million higher for the quarter in the U.S. than expected.
"As we managed the quarter, we generally passed on cost increases from suppliers at the category cost of goods level, but fuel costs accelerated during the quarter faster than we were able to pass them through, creating a timing issue," McMillon said.
Managing Prices
Overall net income dropped 25%, to $2.05 billion, falling short of estimates from analysts.
"We're not happy with the profit performance for the quarter and we've taken action, especially in the latter part of the quarter, on cost negotiations, staffing levels and pricing while also managing our price gaps," McMillon said.
Unseasonably cool weather put a crimp on sales of apparel, patio furniture and landscaping supplies, leading to some markdowns, according to Walmart Chief Financial Officer Brett Biggs. Those unexpected price rollbacks "pressured Walmart U.S. gross profit by about $100 million," he said.
But Walmart is in a good position in a time of high inflation, according to McMillon.
"In Walmart U.S., our sales performance was ahead of plan and we continue to gain share in grocery," he said. "Inflation is lifting the average ticket and our transaction count in stores went up slightly versus last year. ... Price leadership is especially important right now and one-stop shopping becomes more than just convenience when people are paying over $4 a gallon for fuel."
So Walmart increased its U.S. comparable-sales growth projection to about 3.5% for the year versus the original guidance of slightly above 3%. But because of the higher-than-anticipated costs in the first quarter, some of which will continue, the retailer now expects its operating income and earnings per share to be relatively flat, Biggs said.
New Competitors Rise
In a note on Tuesday, Neil Saunders, managing director of data analytics and consulting company GlobalData, praised Walmart for its performance but also warned that the "dynamic of growth in grocery and a relative slowdown in non-food is very unhelpful to margins." He said the retailer may have tougher times ahead because of new competitors.
"We remain broadly optimistic that this more economically pressured environment is one in which Walmart can do well," Saunders said. "However, we are also very aware that compared to previous periods of economic difficulty, consumers have a lot more choice at the value end of the spectrum thanks to the expansion of dollar stores and deep discount chains like Aldi over the past decade."
He added that "this means Walmart will have to work much harder to win over shoppers with its value for money stance."
Walmart officials also discussed the Indiana warehouse fire on the earnings call.
A Duke Realty spokesman in an email said the REIT is committed to working with Walmart to rebuild the AllPoints Midwest distribution center that was destroyed.
"The process will take some time as it is dependent on variable factors such as availability of materials," the spokesman said. "Walmart has been a valued Duke Realty client and we will continue to work with them to accommodate their supply-chain needs."
