Walmart warns of looming drop-off

Sales strong for last quarter, but retailer says shoppers feeling pinch of higher prices

Walmart on Tuesday reported strong sales and profits for last quarter but said that times would be tougher this year, a warning that consumers were starting to pull back as they felt the squeeze from relentlessly rising prices for everyday goods.

The retail giant’s revenue and profit grew more quickly than analysts expected for the three months through January, which includes the holiday shopping season, as consumers made more trips to its stores and spent more per visit than they did a year earlier. Walmart’s quarterly revenue of $164 billion was 7.3% higher than a year earlier. December was the best month for sales in history at Walmart’s U.S. stores, the company said.

But the company forecast more muted earnings for the current fiscal year than anticipated, spooking investors. Walmart’s shares fell in early trading but recovered to post a gain of less than 1% at the close.

Doug Mcmillon, Walmart’s CEO, told analysts on a call that the company was “optimistic that more higher-income families will continue shopping with us.”

It was a similar story at Home Depot, which said that profits would be slimmer this year. The home-improvement retailer’s business is closely tied to the housing market, which has been increasingly shaky as mortgage rates have risen. Home Depot’s shares fell more than 7% on Tuesday.

Last year, “we observed a resilient customer who is less price sensitive than we would have expected in the face of persistent inflation,” Ted Decker, Home Depot’s chief executive, said on a call with analysts. But toward the end of the year, “we noted some deceleration in certain products and categories, which was more pronounced in the fourth quarter,” he added.

The results from Home Depot and Walmart suggested that the resilience of consumers may be starting to crack as inflation and rising interest rates squeeze household budgets.

The retailers’ somewhat downbeat forecasts portend a potential turnaround from recent economic data that showed the economy running hot at the start of the year. In January, job growth was strong, consumers kept spending and prices rose briskly. That led investors to question their assumptions that the Federal Reserve could let up on interest rate increases soon, with many now expecting Fed officials to raise rates a few more times to slow the economy and tame stubbornly high inflation.

Some key suppliers, such as

Procter & Gamble and Unilever, have said they would continue raising prices this year, forcing retailers like Walmart to choose between raising their own prices or seeing profit margins shrink. But others, such as Kraft Heinz and Pepsico, said they would stop raising prices after making hefty increases last year, which led to consumers cutting back and trading down to cheaper brands.

In another sign of rising cost pressures, Home Depot said that it would spend an extra $1 billion this year on raising pay for its front-line workers, including lifting its starting wage to $15 an hour. The company employs 475,000 people at more than 2,300 stores in the United States, Canada and Mexico.