Higher costs hit profits at Walmart

Date : 17 May 2022

Stewart Samuel

Program Director - Canada

Despite a solid sales performance in the first quarter, against tough comparables, Walmart saw a sharp hit on profitability due to higher costs. We look at the impact on its performance and its updated outlook for the year.

Walmart's Q1 key numbers

  • Walmart's total revenue in Q1 increased by 2.4% to $141.6bn, representing an additional $3.3bn
  • Sales in its US stores increased by 4.0%, with Sam’s Club up 17.5%.
  • US ecommerce sales increased 1%, up 38% on a two-year stacked basis
  • US comp store sales increased by 3.0%, with ticket up 3.0% and transactions flat
  • Sam’s Club comp sales (ex-fuel) were up 10.2%
  • International net sales decreased by 13.0%, reflecting recent divestments
  • Operating income decreased by 23.0% to $5.3bn

Source: Walmart

Resetting the focus on the near-term

This was a tougher quarter for Walmart, especially considering what it’s delivered over the last five years. It’s skillfully managed the near-term performance while repositioning the business for a different retail future. In Q1, it slipped on the near-term, but continued to make great progress with ventures such as Walmart Connect, Walmart+ and GoLocal. For Q2, look for a focus on food and fuel, the areas where its customers are feeling the most pressure. Cost negotiations will be a major feature, with an emphasis on opening food price point items, to reinforce its “Save Money” brand promise.

Setting the stage for a stronger second quarter

The business continued to grow the topline, essential for any retailer, but inflation is impacting its shoppers and its operations. Strong post-COVID demand, higher fuel prices and the impact of the war in Ukraine on commodities are driving inflation higher, a situation Walmart expects to persist for some time. It has seen some switching behaviour to private label in food categories and trading down to smaller pack sizes. But the inflationary environment is an opportunity to widen price gaps and grow share. It’s working with its suppliers to limit further cost increases, and in some areas, it’s rolling back prices.

Rising costs

In the quarter, Walmart’s gross profit rate declined 38 basis points, with three quarters of the decline due to higher-than-expected supply chain costs, including fuel and ecommerce fulfillment. The retailer also invested in pricing, to shift excess inventory, while the shift in category mix towards grocery, following strong stimulus-led spending on non-food items last year, pressured the gross profit rate. Walmart also experienced higher than expected wage costs as more of its associates who were out on COVID-19 leave returned to work faster than expected. Due to attrition, staffing is now in line with its sales expectations.

Customers looking for value but profit outlook dampened

Looking ahead, the retailer expects consolidated net sales to increase by 4% for the year, versus earlier guidance of 3%. Customers are shopping Walmart for value, an environment within which it can win. But operating income is expected to be down 1%, a sharp contrast with its earlier guidance of a 3% increase.

”Bottom-line results were unexpected and reflect the unusual environment. US inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected. We’re adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future.”

Doug McMillon, president and CEO, Walmart

Mexico leads international growth

International sales were impacted by divestments of $5.0bn, but retained businesses delivered growth of 6.0%. This was led by Walmex, delivering net sales growth of 10.4% and comps of 9.2%. In Canada, net sales increased 6.9% with comps of 7.7%, and while growth accelerated through the quarter, ecommerce sales fell 4.0%. In China, net sales increased 7.2%, with comp sales up 4.4%, slower than expected due to COVID-19 restrictions. The business saw operational and financial pressures as delivery demand spiked.

Sam’s Club off to a strong start

Sam’s Club continued to power ahead, with net sales up 17.5%, driven by a low double-digit increase in transactions and inflation. Ecommerce sales were up 22%, with a strong contribution from direct-to-home and curbside. Membership income increased 10.5% as membership count hit record levels.

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