Image Source: Mike Mozart
By Brian Nelson, CFA
As we wrote in “The Fed ‘Can’t Stop, Won’t Stop” in early January, the trade-down trends that we’re seeing in big box retail and with groceries, more generally, are interesting. Inflation started to accelerate with food-at-home prices moving aggressively higher in early 2022, and consumers have been trading down to better value. It probably wasn’t until egg prices soared, however — driven in part by a shortage of egg laying chickens (not just inflationary pressures) – that tipped everyday consumers to budget more cautiously, and the largest big box retailer in Walmart (WMT) is seeing this impact first-hand. Here’s what’s happening on the ground, per Walmart’s CEO Doug McMillon on the company’s fourth-quarter 2022 conference call:
One of the things I have always appreciated about this company is that it’s naturally hedged. If customers want more of something and less of something else, we shift our inventory. If the economy is strong, our customers have more money, and that’s great. If things are tougher, they come to us for value.
With today’s inflation, we’re continuing to see that happen. We’re gaining share across income cohorts, including at the higher end which made up nearly half of the gains we saw in the U.S. again this quarter. And we’re also capturing a greater share of wallet at Sam’s Club in the U.S. with both mid- and higher-income shoppers. Our goal is for the experience they’re having in our stores and clubs combined with our current capabilities for pickup, delivery and membership to result in them choosing us even as inflation eventually subsides.
Walmart’s fourth-quarter results weren’t that bad though. Revenue advanced 7.3%, while Walmart U.S. comp sales advanced 8.3% (13.9% on a two-year stack basis). The company’s online business advanced 17% in the quarter, and the firm noted that it “continued to gain market share in grocery.” Incredibly, Sam’s Club comp sales leapt 12.2% (22.6% on a two-year stack basis), with the firm indicating that member count reached an all-time high. This bodes well for Costco (COST). Walmart’s advertising business is also showing strong growth numbers. Investors, however, didn’t like management’s outlook for the first quarter, where adjusted earnings per share is expected in the range of $1.25-$1.30 (versus consensus expectations of $1.37 per share). Here’s more on its guidance from the call:
As we sit here today, we find ourselves in a similar position to each of the last three years, where there is a great deal of uncertainty looking out over the balance of the year. While the supply chain issues have largely abated prices are still high and there is considerable pressure on the consumer, attempting to predict with precision these swings in macroeconomic conditions and their effect on consumer behavior is challenging.
As such, our guidance reflects a cautious outlook on the macro environment, but at the same time, our excitement about our recent results, momentum in all segments and progress on our strategy both for this year and the years that follow. We are positioned well and convicted about our plan.
In FY ’24, we expect operating income growth to outpace sales growth. Given the persistence of high prices and the potential for further macro pressures, we are taking a cautious outlook for the year. We are guiding enterprise sales growth of 2.5% to 3% in constant currency and operating income growth of approximately 3%.
Walmart’s outlook may very well be conservative, but its commentary certainly doesn’t bode well for many discretionary retailers and the broader economy. With the labor markets still strong and the producer price index still coming in hot, the Federal Reserve is not yet done raising rates. We expect the markets to test their uptrends and 200-day moving averages in the coming days to weeks, and if we break through these support levels to the downside, we won’t hesitate to “raise some cash” across the newsletter portfolios. When Walmart warns about the health of the consumer, we pay attention.
Tickerized for holdings in the IEDI.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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