Walmart quarterly net income down almost 40%; retailer raises full-year guidance

Bentonville-based Walmart reported consolidated net income of $3.105 billion in the period and while that was down 39.5% from $5.135 billion reported a year ago it was still better than analysts had expected.

Company officials also said they are ready to ring in the holidays with inventory 11.5% higher than a year ago.

The consensus estimate pegged adjusted earnings per share of $1.40 for the quarter ending Nov. 1. Walmart came through with adjusted earnings of $1.45 before netting out 33 cents from gains on equity investments and 67 cents on losses related to debt repayments.

Top line revenue totaled $140.535 billion for the quarter, up 4.3% from a year ago. Walmart said revenue growth was fueled by increased membership income from Sam’s Club and Walmart+, and inflationary pricing in some categories.

“Our momentum continues with strong sales and profit growth globally. Our omnichannel focus is pushing digital penetration to record levels. We gained market share in grocery in the U.S., and more customers and members are returning to our stores and clubs around the world. Looking ahead, we have the people, the products, and the prices to deliver a great holiday season for our customers and members,” said Walmart CEO Doug McMillon.

Walmart raised its guidance for fiscal 2022 which will end Feb. 1. The retailer forecast U.S. comp sales of 5%, excluding fuel with adjusted earnings per share of $6.40, better than the $6.20 to $6.35 the company previously forecast. Walmart also said capital expenditures for the year will be around $13 billion, short of the $14 billion previously forecast. Much of that spend is to bolster supply chain capabilities with micro fulfillment centers. The company said some of that work will be extended into fiscal 2023.

U.S. STORE SALES
The big story for the retailer in the third quarter was the 9.2% comp sales for its U.S. business, well ahead of the 6.2% forecast by analysts. Walmart said store traffic counts were up 5.7% and average tickets rose 3.3% over the year-ago period. E-commerce contributed 0.1% to overall U.S. comp store sales. Online sales increased 8% from a year ago. Walmart U.S. reported revenue of $96.6 billion in the period, up 9.3% from a year ago. Operating income was $4.9 billion, up 5.9% year-over-year.

Walmart said it took early steps to mitigate supply chain backlogs by ordering earlier than normal, chartering vessels, using less congested ports, running more shifts, and increasing its own supply chain employment with 50,000 new hires in the quarter to work around the clock. Walmart U.S. CEO John Furner said inventory levels are up 11.5% going into the holiday cycle and stores are well-staffed with 150,000 new hires in the quarter for the seasonal push.

The U.S. business saw sales growth of nearly 10% in grocery with increased market share. Sales from food categories increased $3.6 billion, the strongest quarterly growth in six quarters. Kath McLay, CEO of Sam’s Club, said the retail unit ordered seasonal products much earlier and has seen it sell through faster than normal. Inventory is up 7.3% and membership income rose 11.3% from increasing new member counts and more Plus membership penetration.

“We ordered up 100% on Halloween costumes this year and sold through them early,” McLay added.

Sam’s Club reported third quarter comp sales were up 13.9%,on top of 11.1% in the year-ago period. E-commerce sales contributed 1.7% to the company’s comp sales number in the quarter and more members made purchases online for club pickup and delivery. Sam’s total sales were $19 billion, up 19.7% year-over-year. Sales tractions were up 11.1% and average ticket was 2.6% higher than a year ago. Operating income was $500 million in the quarter, up from $400 million a year ago.

Judith McKenna, CEO of Walmart International, said that segment of the business was also ready for holiday sales in the various countries with inventory levels up 10.4% on average. International sales totaled $23.6 billion, down from $29.6 billion a year ago. Divestitures of businesses in the United Kingdom and Japan accounted for $9.2 billion of revenue decline.

INFLATION CHALLENGES
Analysts ask Walmart to discuss the inflationary pressures it is facing around the world and how that might continue to apply downward pressure on operating margins into next year.

“Sam Walton loved the fight against inflation and Walmart is eager to take it on as well,” said McMillon. “We are asking suppliers to swim upstream and take prices down to try and win market share when inflation is taking them up. We have thousands of suppliers and some will be able to do it.”

McMillon also said inflation is not anything new for the retail titan, and while the U.S. market does not have to fight it that often, other countries where Walmart operates have been fighting inflation year after year. He said the company has lots of weapons in its arsenal to help mitigate the impact to the bottom line. He said the Everyday Low Price (EDLP) model embedded in Walmart’s DNA will serve it well during inflationary and deflationary times.

“We can hold prices down longer and keep them lower given our financial strength,” he told analysts on Tuesday.

SQUISHY MARGINS
Analysts were somewhat mixed on their takeaways from the conference call. Inflation was the biggest elephant in the room and despite Walmart execs upbeat tone, equity markets focused on the gross margin decline, which is deemed to be a broad measure of profitability. Walmart’s consolidated gross profit rate decreased 0.43% in the quarter primarily due to increased supply chain costs, a higher mix of lower margin U.S. fuel business, and a shifting international format mix.

“Margins were a little squishy and will be picked at,” Simeon Gutman, an analyst at Morgan Stanley, said in a note to clients. Still, sales “were strong and better than expected.”

Ben Bienvenu, an analyst with Stephens Inc., also said the 24.6% gross margin was lower than expected as well. That said, he added the results in the quarter were impressive and the guidance speaks to Walmart’s ability to manage through a challenging supply chain environment.

“With Walmart U.S. inventory up 11.5% ahead of the holidays, this should help to assuage concerns about the company’s ability to close out the year with strength. We reiterate our ‘buy’ rating for the stock,” he noted. (Stephens does conduct investment banking services for Walmart on occasion and is compensated accordingly.)

Shares of Walmart (NYSE: WMT) fell more than 2.6% in heavy trading by mid-morning Tuesday. Shares were trading at $143 down $3.91 per share with more sellers than buyers for the stock. For the past 52 weeks shares have traded between $126.28 and $153.66.

Analysts were not surprised with the bearish move on the stock given the declining margins and ongoing inflationary pressures. Because historically Walmart has been a winner during inflationary periods, Bienvenu and Gutman remain bullish on the shares long term.

NEWS NUMBERS
• 161 million: The items now available for sale on Walmart Marketplace.
• 3,300: The number of Walmart U.S. stores that offer same-day delivery.
• $1.561 billion: The average daily sales at Walmart around the world during the third quarter.