Walmart quarterly income drops almost 25%; labor costs up 30%

Inflation in the supply chain, higher-than-expected inventory, and a 30% rise in wage costs helped derail Walmart’s first-quarter net income to 74 cents per share after a 56-cent downward adjustment from investments and divestitures losses, the retailer reported Tuesday (May 17).

The $1.30-per-share (GAAP) earnings missed estimates by 18 cents in the quarter. Net income attributable to Walmart was $2.054 billion, down 24.8% from $2.73 billion a year ago. Walmart’s gross margin narrowed to 23.8% versus consensus 24.2% in the quarter. Revenue in the quarter was $141.569 billion, up 2.4% from the same quarter in 2021.

“Across our businesses, we had a strong top line quarter. We’re grateful to our associates for their hard work and creativity. Bottomline results were unexpected and reflect the unusual environment. U.S. 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,” Walmart CEO Doug McMillon said in his prepared remarks.

Stock traders were not impressed with the quarterly results or the lower operating income forecast Walmart made for the balance of this year, even as retailer’s revenue guidance increased to 4% on a constant currency basis. Walmart shares (NYSE: WMT) tumbled more than 8.61% to $135.55, down $12.76 in early trading on Tuesday.

Analysts largely viewed the earnings miss as an execution problem with management who admitted higher inventory costs and labor costs up 30% were the biggest reasons for weaker overall net income.

McMillon said store staffing increased in February as more people returned from COVID leave while additional staff were still in place. He said labor costs moderated by the end of the quarter mostly through attrition. The retailer also saw a 32% increase in inventory, which will take another quarter or two to move. Container and storage costs for the inventory overrun are also pricy. He said inflationary fuel costs also cost Walmart $160 million more than expected in the quarter.

“We are not happy with the financial performance in the quarter,” McMillon told analysts in the Tuesday morning earnings call. “Inflation in the U.S. in food and general merchandise is unusual. We will control what we can control, keep prices low as long as we can, especially on opening price level food products. We also expect the solid top line to continue.”

WALMART U.S.
Walmart posted $96.9 billion U.S. sales in the quarter, up 4% from the year-ago period. Comp sales were up 3% as predicted. Walmart was lapping a difficult comparison with the year-ago period that was buoyed by stimulus. Walmart U.S. reported average ticket was up 3% while transactions were flat. E-commerce sales grew 1% in the quarter and contributed .30% of the comp sales growth in the quarter.

Walmart U.S. CEO John Furner said consumers are showing strength in some respects with higher big-ticket sales on items like patio and game consoles. He said there has been some trade downs in food with more shoppers buying private brands in deli, lunch meat, bakery and dairy categories.

He said gross margin will be pressured in the second quarter as the company works through the excess inventory and continues rollbacks in higher-margin categories like apparel. Furner said the retailer was passing along higher supply chain costs to suppliers where it can. He remains bullish on the food and consumables business saying there was $100 million in mark downs of general merchandise in the recent quarter to try and move excess inventory.

A bright spot for the segment is the growing ancillary businesses like Walmart Connect, Go Local Delivery and Walmart Luminate, the data analytics business. CFO Brett Biggs said Luminate grew by 75% and Walmart has 1,600 delivery points in its growing Go Local business. He said the global advertising business grew more than 30% in the first quarter.

SAM’S CLUB, WALMART INTERNATIONAL
Rising supply chain costs at Sam’s Club did have a negative impact on Walmart’s overall earnings, but the division reported $19.6 billion in first-quarter sales with comp sales rising 10.2%, excluding fuel. Average ticket was up 0.2% with transactions rising 10% in the quarter. E-commerce was strong at Sam’s Club representing 1.5% of the overall sales comp.

Sam’s Club had operating income of $500 million in the quarter down from $600 million a year ago. Membership income increased 10.5% in the quarter and stands a record level.

Walmart International net sales were $23.8 billion, down $3.5 billion, or 13%, negatively affected by $5 billion due to divestitures, and $400 million from currency fluctuations. Judith McKenna, CEO of Walmart International, said Mexico comps rose 9% and Canada had sales comps of 7.7%, also performing ahead of expectations. China was challenged from ongoing COVID shutdowns but still managed to produce 4% comp sales growth.

She did not provide financial data for Flipkart but did say the Indian business is continuing to generate new forms of revenue with its diversified business model. There was no mention of Massmart, Walmart’s African business that it is working to downsize.

ANALYST REACTION
The Walmart earnings miss was an execution problem relating to internal operations, more so than external pressures, according to CNBC analyst Jim Cramer who said McMillon rolled a gutter ball in the quarter. Dana Telsey of Telsey Advisory Group said retailers have to figure out how to navigate the inflation and supply chain issues, and those who do like Costco and Home Depot will outperform those who don’t like Walmart.

“Management indicated they can recoup some of these margin dollars as the year progresses, while still maintaining a conscious effort to offer industry-leading value to consumers,” noted Ben Bienvenu, an analyst with Stephens Inc. “We reiterate our overweight rating but reassess our price target and earnings guidance following the report.” (Stephens conducts investment banking services with Walmart and is compensated accordingly.)

UBS analyst Michael Lasser said he thought the sell-off in stock price following the earnings report was too much. He said Walmart is a retail business that should bode well in times of rising prices as they have the wherewithal to keep price gaps longer than most. He also believes most of the earnings miss was related to issues that have since been addressed.