The Washington Post

Walmart’s profit outlook signals trouble in retail

- BY HAMZA SHABAN, JACLYN PEISER AND AARON GREGG

Walmart sounded alarms Monday when it slashed its quarterly and full-year profit forecasts — a warning that so rattled Wall Street, the retailer’s stock went into a nosedive.

Household spending has been resilient even in the face of other economic challenges — including scrambled energy markets, supply chain bottleneck­s and decades-high inflation, among others. Because consumers power more than two-thirds of the economy, that willingnes­s to spend has been held up as a key counterpoi­nt to sentiments that the nation is barreling toward recession.

But the message from the nation’s largest retailer spells trouble, as it’s a sure sign that stubbornly high prices are changing how people spend. Besides the hit to its bottom line, the shift leaves more inventory gathering dust on store shelves and in warehouses. That motivates the retailer to aggressive­ly mark down merchandis­e that customers may no longer want or can’t afford. What’s more, Walmart’s story is a harbinger for other retailers and the broader economy. Here’s why.

What happened to Walmart?

Chief executive Doug Mcmillon said the rising cost of groceries and gas was eating into household budgets, prompting shoppers to avoid other parts of the store such as the clothing aisles. That led the company to go heavy on discounts to push general merchandis­e into shopping carts, a tactic that lowers profits.

The message, disclosed Monday after U.S. markets closed, spooked investors. Walmart tumbled 7.6 percent on Tuesday, closing at $121.97 a share. Other retailers got dragged down, too, because they confront similar hurdles: Target tumbled 3.6 percent; Best Buy, 5.1 percent; Amazon, 5.2 percent; Dollar Tree, 6.3 percent; Macy’s, 7.2 percent; and Kohl’s, 8.9 percent. (Amazon founder Jeff Bezos owns The Washington Post.)

This isn’t the first warning from retailers about a pileup of inventory. In May, Target set off alarms — its stock lost more than a quarter of its value — after reporting a 52 percent drop in first-quarter profits. The Minneapoli­s-based company cited supply chain pressures and rising expenses, factors that also hurt Walmart, that led to heavy markdowns.

Walmart had slashed its outlook for the year last quarter after earnings dropped 25 percent. It cited rising fuel and labor costs and inflation steering customers to lower-margin goods.

How does this impact consumers?

Deals. Deals. Deals. As Walmart executives become more aggressive about clearing out inventory, the company is slashing prices on clothes and higherpric­ed items like furniture, vacuums, TVS and other gadgets.

The markdowns arrive just in time for back-to-school shopping and as increased costs for essentials like food and gas have made consumers more price-conscious. Items like wire-bound notebooks, pencils and Chromebook­s are less than half their original prices. Mcmillon noted in the earnings update that he’s “encouraged by the start we’re seeing on school supplies.”

As the nation’s largest retailer, Walmart will probably set the pace for other big-box stores. Though brands like Target have already been aggressive in their pursuit of online and in-store sales, markdowns at Walmart will probably push its competitio­n to cut prices even more.

Why does retail spending matter?

Consumer spending is the backbone of the economy and an important indicator of a possible economic downturn. The more people have to shell out for housing, groceries and fuel, the less they have for discretion­ary purchases like electronic­s and clothing. And when consumers pull back, companies feel it: Inventory stacks up, causing stores to lower prices and hold off on buying from their suppliers. That all contribute­s to slower economic growth. The Bureau of Economic Analysis’s first-quarter gross domestic product report showed that the economy contracted 1.6 percent. The second-quarter report will be released Thursday.

There was a bit of hope this month when the Commerce Department announced that retail sales rose 1 percent in June. But analysts noted that the uptick is thanks to higher prices.

What do price cuts mean for inflation?

While discountin­g makes certain products cheaper, they also hint at a broader affordabil­ity problem for consumers.

“Walmart bringing prices down is somewhat helpful to some consumers, but it won’t reverse the inflation story singlehand­edly,” said Sucharita Kodali, a vice president and principal analyst at market research company Forrester.

The most recent government data shows inflation barreling forward despite the Federal Reserve’s efforts to put a lid on prices. The consumer price index was 9.1 percent higher in June than it was in May, led by a 7.5 percent spike in energy costs. An index tracking prices for fuel, oil, gasoline and electricit­y jumped 41.6 percent for the year, marking the largest 12-month increase since April 1980.

More people are shopping at Walmart as a result, giving the company more market share compared with its pricier competitor­s. But price cuts are happening because shoppers are spending so much more on food and fuel, crowding out other expenses, according to Walmart’s Mcmillion.

“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hard-line categories, apparel in Walmart U.S. is requiring more markdown dollars,” Mcmillon said, adding that he expects further difficulti­es with general merchandis­e in the second half of the year.

If prices are falling, what are people buying?

The sudden change in consumer preference­s is ones of the biggest themes of the pandemic-era economy. During the early phase of the public health crisis, when many Americans stayed at home for prolonged periods, households stocked up on goods to pass the time and make life more comfortabl­e. Casual and athletic apparel were in high

demand. So were TVS, appliances and other home goods.

But as schools, offices, government buildings and social gatherings began to open up, consumers started to shift their spending from goods to services, catching many retailers — who had been struggling to keep up with demand — off guard. Now retail inventory is elevated at a time when prices are climbing, loans are more expensive and emergency covid relief checks are long gone.

Analysts are also looking to how the holiday shopping season may be affected.

“There is a concern with the consumer being more price-conscious, they may pull back on holiday spending,” said Lindsey Bell, chief markets and money strategist for Ally. “The health of the consumer remains strong, but shifts are happening under the surface.”

 ?? Brandon Bell/getty images ?? A customer shops at a Walmart in Houston on July 8. The company cut its quarterly and full-year profit forecasts on Monday. Although household spending has been resilient, the rising cost of groceries and gas has prompted some consumers to avoid other parts of the store.
Brandon Bell/getty images A customer shops at a Walmart in Houston on July 8. The company cut its quarterly and full-year profit forecasts on Monday. Although household spending has been resilient, the rising cost of groceries and gas has prompted some consumers to avoid other parts of the store.

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