Walmart Shares Tank on 24.8% Net Profit Decline Blamed on Higher Costs

Walmart shares hit a 52-week low Tuesday after it reported a 24.8% net-profit decline to $2.1 billion in fiscal Q1 ended April 30. Revenue grew 2.4% to $141.6 billion, below analysts' expectations. The stock closed 11.4% lower at $131.35.

“We’re not happy with the profit performance for the quarter,” said CEO Doug McMillon on a Tuesday earnings call. He cited higher costs for fuel, wages, containers and storage, and an “unfavorable gross margin mix,” as inflation led customers to shift spending toward food and away from general merchandise. Chief Financial Officer Brett Biggs said Walmart wasn’t able to “fully address or pass along” some cost increases that affected profit more than expected: “We’re now managing those costs and passing them along more effectively,” though higher fuel and inventory costs will continue into Q2, he said.

For Q2, Walmart’s revenue guidance is 5% growth over Q2 2021. It tweaked Q2 operating income to “flat to up slightly” from low-to-mid single-digit growth as a result of higher than expected costs in Q1 “and the expectation of some of that to continue,” Biggs said. Walmart U.S. comparable sales growth is projected at 4%-5%.

Gross margin in the quarter declined 89 basis points year on year, due in part to “pressure” at Sam’s Club from supply chain costs, fuel mix, and inflation of markdowns due to inventory delays. Walmart U.S. gross margin rate was down 38 basis points due to supply chain, fuel and e-commerce fulfillment costs, Biggs said. Though the supply chain improved early in Q1, war in Ukraine and ongoing COVID-19 impact, including shutdowns in China, exacerbated challenges, he said.

Walmart hired additional staff in response to the rise in omicron cases at the end of the year, and most employees out on COVID-19 leave came back earlier than expected, resulting in “overstaffing,” McMillon said. Staffing issues were resolved in the quarter ended April 30, mostly through “attrition,” he said, saying it took time in March and April to align wage costs with sales.

Inventory was up about 33% in Q4, “higher than we want,” said the CEO, saying the company will work through most excess inventory over the next few quarters. Walmart had “aggressive rollbacks” in the quarter, mostly in apparel.

Walmart U.S. comp sales were up 3% year on year, with general merchandise sales “softer” than grocery, Biggs said. Transactions were flat; average ticket rose 3%. E-commerce sales inched up 1% against strong stimulus-led gains in 2021 and consumers’ return to stores, he said.

On how Walmart customers are responding to inflation, Walmart U.S. CEO John Furner said the retailer has seen strong growth from higher, middle and lower income customers, and “a definite strength with high-ticket items,” while other consumers are switching from brands to private-label brands, especially in grocery.

For the year, Walmart now projects a 1% decrease in operating income, in constant currency, vs. a February projection of a 3% bump. Despite the Q1 revenue miss, “there's still a lot of leverage to pull,” for full-year sales, McMillon said. Management referenced Walmart’s growing international, healthcare, fintech, fulfillment, delivery and advertising businesses.