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Is peak inflation finally here? The retail sector, which has been under heavy pressure for most of the year due to the consistently rising high cost of living, may finally get some reprieve.
Although Walmart (WMT) has done a solid job managing its input costs, the company’s profits have nonetheless suffered as household budgets sought to prioritize necessities over discretionary items. This shift in consumer behavior comes at a time when the Federal Reserve was raising interest rates to curb inflation, while the company battles supply chain disruptions. As a result, the company has slashed its full year earnings guidance by a dollar since the start of the year.
The low-price leader will report third quarter fiscal 2023 earnings results before the opening bell Tuesday. How much impact will the revised inflation data have on Walmart’s guidance? According to the Bureau of Labor Statistics, which released its data Thursday, the Consumer Price Index (CPI) in October logged a 7.7% increase over last year and 0.4% increase over September. This compared to expectations for prices to rise 7.9% over the prior year and 0.5% month-over-month.
Meanwhile, on a “core” basis — which strips out food and energy which are often volatile — prices rose just 6.3% year over year and 0.3% over October. Expectations were for a reading of 6.5% and 0.5%, respectively. The market is now betting the Fed to become more dovish regarding interest rate increases, starting at its next meeting in December. This shift in sentiment will benefit Walmart at a critical time in the business cycle given the pending holiday shopping season. The company on Tuesday will need to talk positively about the macro impact on its customers.
In the three months that ended October, Wall Street expects Walmart to earn $1.32 per share on revenue of $147.56 billion. This compares to the year-ago quarter when earnings came to $1.45 per share on revenue of $151.53 billion. For the full year ending January, Walmart’s earnings are projected to decline 9% year over year to $5.88 per share, while full-year revenue of $600.24 billion would rise 4.8% year over year.
The expected lower earnings and revenue for the quarter and full year have impacted Walmart stock, which has fallen 20% from its 52-week highs of around $160. The stock is now down 4% over the past year, though outperforming the 14% decline in the S&P 500 index. But now would be an ideal time to build a position. Walmart’s hybrid model of brick-and-mortar retail and e-commerce has given it an advantage over its rivals.
Having made consistent investments in technology and fulfillment, the current inflationary environment has played in Walmart’s low-price model as consumers shop to stretch their spending. Likewise, the investments the company has made in its e-commerce initiatives have also paid dividends. Investors on Tuesday will want to know how the company’s grocery business is holding up. Historically, the grocery business has been immune to changes in economic cycles, and has produced well among other categories.
In the second quarter, grocery revenue helped drive a top and bottom line beat. Q2 revenue rose 9.1% year over year to $152.9 billion, topping consensus by $1.4 billion. Walmart reported total U.S. same-store sales increased 6.5%, beating estimates for a 6.2% increase. E-commerce growth was 12% year over year and 18% on a two-year basis. Meanwhile, Q2 adjusted EPS of $1.77 topped estimates by 17 cents.
Walmart did a solid job combatting the slowdown in spending and rising costs. On Tuesday, investors will want to see whether this trend can continue. The Q4 guidance will reveal the company’s level of confidence as it heads into the holiday shopping season.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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