After market close this evening, Walmart (WMT) announced that it is cutting its Q2 earnings guidance, forecasting adjusted EPS to decline 8%-9% from last year’s levels. The guidance implies a range of $1.62-$1.64 from last year's $1.78 and is well shy of the $1.81 consensus. Today’s announcement also marks the second time this year that Walmart reduced its outlook.
SECOND GUIDANCE CUT OF 2022: On May 17, the company forecast that Q2 would be “flat to up slightly” vs. its prior projections of “up low to mid-single digits”. Today, Walmart also updated its FY23 earnings projections with expectations of a 10%-12% decline in EPS. This compares to its prior guidance of “flat” in the May update, which was also a downgrade from the original view of up 5%-6%. Based on FY22 earnings per share of $6.46, the guidance implies a $5.68-$5.81 range, which is also below the current consensus view of $6.43.
RETAIL INVENTORY ISSUES CONTINUE: Walmart is attributing today’s update to pricing actions required to improve inventory levels. The company is citing double-digit food inflation affecting its customers’ ability to buy general merchandise categories, which calls for greater discounting and promotional activity to move through its inventory – particularly the apparel category. Walmart’s announcement also echoes a similar “inventory right-sizing optimization” announced by Target (TGT) on May 7, when it released a plan of actions to implement additional markdowns, remove excess inventory and cancel orders. Much like Walmart, Target CEO Brian Cornell also cited the shift in “consumer buying patterns” behind the company’s decision.
ANALYST CAUTION WARRANTED: Just this past Friday, Piper Sandler analyst Edward Yruma published a sector research note resuming coverage of Walmart with a Neutral rating and warning that excess inventory remains a pressure point for the company. Yruma speculated that while Walmart’s long-term share gains would continue thanks to upgrades to the store experience, he saw the “middle of the middle consumer” being “highly cautious” as a result of inflationary pressures. Earlier this month, Oppenheimer analyst Rupesh Parikh also raised a red flag on Walmart while removing the stock as his Top Pick. Parikh stated that when he visited several Walmart locations to assess inventory conditions, he observed “very high levels of markdowns” in the apparel category and heavy inventory among the more discretionary items.
GUIDANCE CUT SINKS WALMART AND OTHER DISCOUNT STORE STOCKS: Discount store industry names have generally fared better than the stocks in the consumer cyclical group thus far this year. Walmart and Costco (COST) were down mid-single digits year-to-date prior to today’s announcement. While Target (TGT) is down over 30%, the largest off-price discounters Dollar General (DG) and Dollar Tree (DLTR) are up 5% and 20%, respectively. Price action after Walmart’s Q2 pre-announcement and guidance cut this evening suggest that this gap stands to narrow. Late in the after-hours session, Walmart stock is down nearly 10%, Target (TGT) is down 5%, and shares of Costco, Dollar Tree, Olli's Bargain Outlet, and Dollar General are all down by over 3% apiece.
