Walmart said it's dealing with what is 'arguably a softer consumer environment' than what it saw earlier in the year
Walmart's stock was tumbling Thursday.
Shares of Walmart slid on Thursday after the retail giant reported quarterly results that suggested its U.S customers are under pressure due to tougher economic conditions.
Walmart reported disappointing U.S. quarterly comparable sales growth, which it said reflected constraints on consumers, as well as a hit to drug prices caused by changes to Medicaid regulations on prescriptions. The company's third-quarter forecast came in below Wall Street's expectations.
During Walmart's earnings call, management said it would take more steps to cut prices this year. CFO John David Rainey said the chain was operating in "arguably a softer consumer environment than in February." He noted that the company was "seeing some incremental pressure on the consumer relative to the beginning of the year, with higher fuel prices."
"As you go through month by month in the last quarter, you can tell when fuel prices increased and got above $4, and perhaps there's a psychological impact to that - that there are choices that consumers are making," Rainey said.
"So June was a little more obvious as we look at the quarter, in terms of customers making trade-offs," he added. "And it's why we have leaned so heavily into lower prices."
The 9.3% drop in Walmart's stock $(WMT)$ on Thursday came even as the big-box retailer raised its sales and profit outlook for the year, with management projecting confidence that it could gain a bigger slice of the retail market overall. But investors appeared to look past that optimism, focusing instead on the near term - and the next three months in particular.
The company on Thursday said it plans to invest in keeping prices lower through the second half of the year, though that could weigh on profits.
"We talked about, at the end of the first quarter, that customers are feeling some pressure," CEO John Furner said on Thursday's call. "So we're proud of our investments. We're very thoughtful about those investments, the categories they went in, the timing of those investments, and we'll manage them across the two quarters."
Walmart's financials, along with those of rival Target (TGT), are closely watched by investors to gauge the health of the U.S. consumer, especially in a year when Americans have grown fatigued with higher oil prices (CL00) due to the Iran war that have pushed up costs.
For the full year, Walmart said it sees sales increasing by between 4% and 5%, above its previous outlook of between 3.5% and 4.5%. Big sales gains in e-commerce and its advertising business helped make executives more upbeat.
However, for the third quarter, Walmart said it expects sales to increase between 3% and 3.75%, below Wall Street analysts' forecasts for 4.8%. The company said it expects adjusted earnings per share of 62 to 64 cents; analysts expected 68 cents.
The Bentonville, Ark.-based company reported second-quarter revenue of $187.9 billion - a rise of nearly 6% from a year earlier, and marginally higher than analysts' estimates of $186.7 billion, according to the London Stock Exchange Group. E-commerce sales globally rose by 23% in the period that ended July 31, Walmart said.
"Our team delivered another good quarter, and we continue to make steady progress on the long-term value drivers of our business," Furner said in a statement accompanying the results.
The company said that its comparable sales at U.S. locations, omitting fuel, increased by 2.6% in the quarter, owing to pressure in its pharmacy unit following changes to Medicare drug-price regulations. That marked Walmart's lowest growth since its fourth quarter of fiscal 2020 - which covered the three months that ended Jan. 31, 2020 - when sales increased by 1.9%.
Walmart said its gross profit rate grew by 96 basis points in the second quarter, primarily led by the impact of tariff refunds in the U.S. On Thursday's call, management said that the company received "substantially all" of the roughly $2.9 billion in tariff refunds that it was eligible for.
The retailer, which has close to 11,000 stores in 19 countries, posted earnings per share of 80 cents for the quarter, down from 88 cents for the same period last year but surpassing the Wall Street consensus for 74 cents, per LSEG data.
Despite Thursday's selloff, analysts at Jefferies led by Corey Tarlowe wrote in a note Thursday that they see Walmart as continuing to operate "from a position of strength." They noted that excluding its health and wellness division, comparable sales in the U.S. grew by 3.4%.
"Underlying trends remain supported by transaction growth, broad-based share gains and continued strength across e-commerce, advertising, marketplace and membership," the Jefferies analysts said.
On Wednesday, Target reported better-than-expected second-quarter results and raised its full-year sales-growth forecast to around 5%. Target shares were up 0.5% on Thursday.
-Nora Redmond -Bill Peters
