Walmart followed main competitor Target in lowering its quarterly and year-end guidance, citing the continuing drag of overstocked inventory and shoppers focusing more on lower-margin essentials and less on categories like electronics and apparel.
The scenario is causing a negative effect on pricing and profit, causing not only Walmart’s stock to suffer but others in retail as well, including major players Target and Amazon.
Walmart is now calling for adjusted earnings per share for the second quarter to decline by 8% to 9%, compared to previous guidance of flat to up slightly, and to drop 11% to 13% for the year vs. previous guidance of a 1% decline.
Same-store sales in the U.S. are projected to increase 6% in Q2, higher than the previous guidance of 4% to 5%. But the merchandise mix is what’s affecting the bottom line. The high prices of food and fuel is requiring Walmart to be more aggressive in markdowns on general merchandise to move bloated stocks, especially apparel.
“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” said Doug McMillon, Walmart president and CEO in a release. “We’re now anticipating more pressure on general merchandise in the back half; however, we’re encouraged by the start we’re seeing on school supplies in Walmart U.S.”
McMillon said Walmart made progress in the recent quarter reducing inventory “by managing prices to reflect certain supply chain costs and inflation, and reducing storage costs associated with a backlog of shipping containers.”
Earlier this month, Walmart made its in-home delivery service an add-on to its subscription Walmart+ program, creating a single registration in an effort to boost membership. But some industry observers feared Walmart’s program and others may be hurt as the inflation waves cause consumers to take a harder look at monthly and yearly subscription fees.
Target similarly guided investors down in June for its fiscal second quarter, also due to excessive inventory and margin pressure. The company announced various steps to address the issue, including more markdowns, removing excess inventory and canceling orders, adding capacity at ports, pricing actions to address high supply chain costs and working with suppliers to shorten distances and lead times.