Walmart (WMT) shares plunged lower Tuesday after the world's largest retailer slashed its second quarter and full-year earnings forecasts owing in part to its higher-than-expected inventory levels and ongoing inflation pressures that have cut into profit margins.
Walmart said operating income will likely decline by between 13% to 14% over its fiscal second quarter, which ends in July, and between 11% and 14% for the full year. Adjusted earnings are forecast to slide between 8% and 9% for the second quarter, and 11% to 13% for the year, a sharp decline from its May forecast of just a 1% pullback.
Operating margins are likely to come in at 4.2% for the second quarter, before narrowing to between 3.8% and 3.9% for the full year, Walmart added, as it marks down clothing and other items to compensate for the extra cash customers are having to spend on food and gas.
Walmart, which saw a 33% increase in overall inventories last quarter, said in early May that it would keep prices "as low as we can" in order to shift inventories over the coming months.
"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 CEO Doug McMillon. "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."
Walmart shares were marked 8.8% lower in early trading Tuesday to change hands at $120.37 each, a move that would extend the stock's year-to-date decline to around 17.6%. Target (TGT) shares fell 3.7% to 149.81 each.
The retailer was still relatively bullish in terms of overall revenues, forecasting comparable store sales in the U.S. to rise by 6% in the second quarter, a 100 basis point increase from its previous estimate. Net sales will likely rise by 7.5% for the quarter, but slow to a pace of 4.5% for the full year owing to a $1.8 headwind linked to the strength of the U.S. dollar.
A stronger dollar erodes the value of overseas sales, and makes profits generated in foreign markets more costly to repatriate. The U.S. dollar index, which tracks the greenback against a basket of six major global currencies, has risen more than 12% so far this year and reached a fresh two-decade peak earlier this month.
Last month, Citigroup analyst Paul Lejuez noted that average U.S. retail inventories are outpacing sales gains by around 10 percentage points, the widest gap since the pandemic, as retailers struggle to manage both supply chain disruptions, fuel and freight costs, and rapidly shifting consumer habits.
Target has said that its bigger-than-expected 35% build-up in overall inventories would likely trigger price cuts, said in June that operating margins would narrow to around 2% over the current quarter before rebounding into the second half of the year.
"In some ways, (Walmart's profit warning) shouldn’t be a big surprise given Target’s pre-announcement early in June," said D.A. Davidson analyst Michael Baker.
"Given their less discretionary mix, we thought that Walmart may have been holding up better. Just over 55% of Walmart's business is grocery, while only 20% of Target's is food & beverage," he added. "However, it turns out that Walmart is being impacted by many of the same issues, which is to say weaker sales of discretionary sales against inventory levels that are too high in those areas."
Target shares fell 4.9% to 149.81 each.
