These charts explain Walmart's stunning profit warning 📉
But what's bad for Walmart may be good for consumers 😘
Walmart WMT warned Monday that its profits for the year would be much lower than previously anticipated.
“Food inflation is double digits and higher than at the end of Q1,” the company said in a statement. “This is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel.“
Rising costs and marked-down prices are bad news for profit margins. Indeed, even as the company expects to report revenue growth of 7.5% in Q2 and 4.5% for the full year, Walmart forecasts operating profits to fall 13%-14% and 11%-13%, respectively.
These are not company-specific issues. Rather, these are challenges facing the entire retail industry.
The food inflation story is pretty well known, as it’s been thoroughly covered in mainstream news.
The general merchandise story, however, hasn’t been covered quite as extensively.
Simply put, retailers have accumulated general merchandise inventory much faster than they have been able to sell it. This dynamic is illustrated nicely in this chart from Bank of America.
What was once a shortage is now an over-stocking problem, as general merchandise inventories are at levels we haven’t seen in about 15 years.
Bank of America analysts explained what happened in a note circulated last Thursday (emphasis added):
What caused this shift from supply shortages to overstocking? We see two main factors. First of all, stocking decisions are made a number of months in advance and do not reflect the current environment. Big box retailers stocked a large amount of items such as home goods, electronics and big ticket items expecting continued resilience in demand. However, consumers quickly rotated to services spending this year, and high inflation is also keeping some consumers at bay. Second, there is a mismatch between supply and demand in inventories. In other words, the inventory in stock isn’t what consumers are trying to buy. Due to supply chain snarls, some inventory arrived too late to sell during the right season, which has prompted various big box retails to announce discounts to decrease unwanted inventories and attract more buyers in general.
Inventory levels in the clothing category at the national level are not quite as bloated, but they are approaching pre-pandemic levels.
Here’s Bank of America on clothing inventory (emphasis added):
Census data also shows clothing spending was also negative on a %YoY basis in June. Lower clothing demand combined with easing supply chain constraints means Inventories for clothing stores have also been rising. Specifically, inventory to sales ratio was at 2.18 in May 2022, which was the highest since February 2021, but it was still lower than the 2011-2019 average of 2.40. Similar to general merchandise, there seems to be a mismatch between demand and supply at clothing stores as well: press reports suggest that demand for formal attire is rising again as consumers head back to office and to formal events like weddings, whereas clothing retailers have a lot of casual attire in inventory for which the demand has slowed considerably.
Walmart’s announcement isn’t totally surprising: The company and its peers have been warning about bloated inventory levels in some retail categories for months.
It’s bad news, but also good news
Walmart shareholders and retail industry investors are not going to be happy about what’s likely to happen with stock prices in the near-term. Walmart’s stock took a dive in after-hours trading, along with other retailers like Target TGT and Amazon AMZN .
However, these price markdowns are great news for consumers shopping for these goods. All things being equal, it’ll help bring down broad-based inflation metrics.
As earnings season continues, expect more companies to discuss challenges related to inventories.
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