Walmart Gets Cautious on Economic Outlook, Sees Lower 2023 Performance

RETAIL INDUSTRY - BENTONVILLE. Walmart Inc struck a cautious note in its economic outlook for 2023 on Tuesday as the retail bellwether forecast full-year earnings below estimates and warned that cautious spending by consumers could pressure profit margins.

Shares of the world's largest retailer fell 2.4% in premarket trading as the company continued to battle price hikes from many of its product suppliers in a high-inflation environment.

Higher U.S. consumer prices, amid loftier costs for rental housing and food, have raised fears the U.S. Federal Reserve could further lift borrowing costs to cool domestic demand, leading to an economic downturn in the second half of the year.

"There's still a lot of trepidation and uncertainty with the economic outlook. Balance sheets are continuing to get thinner, savings rate is roughly half of what it was at a pre-pandemic level and we've not been in a situation like this where the Fed is raising at the rate that it does," Chief Financial Officer John David Rainey told Reuters.

"So, that makes us cautious on the economic outlook because we simply don't know what we don't know."

Walmart forecast earnings of $5.90 to $6.05 per share for the year through January 2024, below analysts' estimates of $6.50 per share, according to Refinitiv IBES data.

The forecast includes a 14-cent estimated impact from an accounting charge related to moderating inflation in key merchandise categories and reduced inventory levels at its Walmart U.S. and Sam's Club business, the company said.

On a post-earnings call, Walmart's Chief Executive Officer Doug McMillon said he expects "stubborn inflation" in dry grocery and items made for immediate consumption to have some "mixed" impact this year.

"In some years, our performance will be higher and in some years lower ... This year will likely be lower," CFO Rainey said on the call.

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Investors in Walmart, which operates more than 5,000 stores in the United States, have been keenly eyeing efforts to negotiate better prices from suppliers and ward off competition from rivals such as Target Corp, whose products are relatively pricier.

Rainey said the company recognized that suppliers were dealing with elevated costs. However, the company is using data and leveraging metrics, including best-performing merchandise and best-performing categories, in negotiations with suppliers to pass on lower prices to consumers, he said.

Companies, including Procter & Gamble and KitKat maker Nestle, have said they would raise prices further this year.

Inflation-squeezed consumers are increasingly shifting toward buying more food and consumables from general merchandise, which Rainey said he expects to continue this year and be a drag on margins. Toys, electronics, home and apparel remain soft spots, the company said.

This hit Walmart's consolidated gross profit rate, which fell 83 basis points.

Still, Walmart reported strong demand in the holiday quarter ended Jan. 31, posting total revenue of $164.05 billion, a 7.3% increase from last year. Analysts had estimated revenues of $159.76 billion. Comparable sales in the United States rose 8.3%, excluding fuel, helped in part by higher prices and e-commerce sales.

Adjusted earnings per share came in at $1.71 for the quarter, handily beating the $1.51 average expectation.

CFRA Research analyst Arun Sundaram said he expects low-, middle- and high-income consumers to increase their visits to Walmart this year as they seek out cheaper alternatives.

"We see the consumer increasingly under pressure ... that should bode really well for Walmart," he said.