Walmart Flashes a Warning Sign to the B2C Economy

Walmart Inc. just highlighted the dark side of inflation.

The world’s biggest retailer on Tuesday reported profit that fell short of Wall Street expectations and downgraded its outlook for full-year earnings per share from a mid-single-digit increase to a 1 percent decline. CEO Doug McMillon said the bottom-line results were “unexpected” and reflect the “unusual” environment. The company’s shares fell as much as 9 percent.

The outcome is certainly surprising—and should be a warning sign for the broader consumer economy.

Inflation is usually a benefit to supermarkets and consumer-goods companies, as higher prices elevate the value of their sales. If they can keep volumes stable, then their same-store sales automatically rise. Indeed, this is exactly what happened at Walmart: U.S. same-store sales, excluding fuel, rose 3 percent compared with a year ago, topping analysts’ estimates of a 2 percent increase.

However, higher staff costs, bloated inventories, and more expensive fuel took their toll on profits. Each accounted for about a third of the shortfall.

First, Walmart’s wage costs expanded. The company hired many employees at the end of last year to cover for staff who were out sick with the Covid omicron variant. But the ill employees recovered, which meant the company had weeks where it was overstaffed.

Second, Walmart sold less clothing and home furnishings than expected, and these are some of its more profitable categories. It had stocked up on such items amid last year’s supply-chain snarl-ups, and inventories were up about a third, to $61.2 billion.

Finally, Walmart had to pay $160 million more for fuel in its U.S. business, and it could not pass this through to store prices as quickly as it had hoped.

The results are unusual, though, because Walmart has been famously cost-conscious. Its frugal philosophy is a big part of why it’s able to charge such low prices. If Walmart is struggling, even with its thriftiness and superior scale, then smaller and less efficient retailers are in for a very difficult time—not least because there was another note of caution in Walmart’s first quarter announcement.

The squeeze of inflation on discretionary incomes is starting to affect what consumers buy. Because Americans were having to spend more on food, they cut back on clothing and home furnishings more than Walmart had expected. Unseasonably cool weather, affecting items such as apparel and patio furniture, didn’t help.

Walmart isn’t the only retailer to feel the pinch of high prices. While Home Depot Inc. reported better-than-expected first-quarter sales and saw an 11 percent increase in the average amount that each consumer spent in the first quarter, the number of customer transactions fell by 8 percent.

Despite the pressures on Walmart, the retailer looks relatively well placed to weather the storm. The drop in its share price seems overdone. The group should be able to work through its high inventory levels in the coming quarters. It helps that it is facing these issues at the start of the summer season rather than the end. And Walmart’s focus on value should help it win over more customers.

Some shoppers will inevitably trade down or put fewer items into their baskets, but others will move from pricier retailers to Walmart. At the same time inflation increased the average amount each customer spent, the number of transactions in stores also rose slightly versus a year ago. Target Corp., which reports first-quarter sales on Wednesday, should benefit from the same dynamic.

Meanwhile, Walmart’s scale means it should have more clout with suppliers, such as Procter & Gamble Co. and Nestle SA, as they try to pass down their own cost increases. That should help the retailer manage food price inflation.

Of course, there are dangers—particularly in the rise of the German no-frills supermarkets Aldi and Lidl, which are expanding across the U.S. and competing on the same battleground of stable, low prices.

But if Walmart is feeling the effect of the stretched consumer, other retailers have much more to worry about.

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