Walmart (WMT) Tackles Inflation: Buy or Sell Move for Investors?

Walmart (WMT) Tackles Inflation: Buy or Sell Move for Investors?

Posted On October 26, 2023 11:00 am

Inflation accelerated significantly last year, hitting a four-decade high of 9.1% in June 2022, pushing food prices higher. This led to many retailers experiencing consumers pulling back on spending. While inflation has fallen sharply from its peak, it is still higher than the Fed’s target.

According to a Labor Department report, the Consumer Price Index (CPI), a closely followed inflation gauge, grew 0.4% in September and 3.7% year-over-year, beating respective Dow Jones estimates of 0.3% and 3.6%. Food costs were up 0.2% for the third quarter in a row. On a 12-month basis, food costs jumped 3.7%, including a 6% surge for food away from home.

Walmart Cuts Grocery Prices Amid Inflation

With persistent inflation in mind, popular grocery chains are trying to help customers save with new deals. Walmart Inc. (WMT), the country’s largest grocer, recently announced that it would be “removing inflation” on some of its grocery prices starting next month.

“This year, finally, we are able to have the Thanksgiving basket that the prices are coming down versus a year ago — we are really proud to say that the price of a Thanksgiving meal is going to come down,” Walmart U.S. President and CEO John Furner said during an exclusive interview on “Good Morning America.”

Last year, during a period of historically high inflation, WMT sold Thanksgiving ingredients at the same price as 2021. This year, the Thanksgiving basket from Walmart includes ingredients to make a meal for up to 10 people, which the company will “sell for around $2 less than last year” at just over $70.

Furner added that this move of cutting prices comes on the heels of consumer feedback: About 92% of its shoppers have expressed “some level of concern about inflation and how it will impact holiday celebrations.”

Like Walmart, fast-growing discounter Aldi expressed a similar sentiment about “high food prices” and announced price cuts of up to 50% starting November 1 and running through the year-end on more than 70 Thanksgiving favorites.

With food retailers offering temporary discounts on select items during peak seasons, including the holidays, a high volume of customers would drive into their stores and online for substantial savings. This is an effective way to boost sales, build customer loyalty, and have a competitive edge over peers.

Overall, holiday sales in November and December have averaged approximately 19% of total retail sales over the last five years, and the figure can be higher for some retailers, according to the National Retail Federation.

Strong sales during the holiday season should give a solid boost to WMT’s stock. Shares of the retailer have gained nearly 6% over the past six months and 17% over the past year.

Let’s look at several other factors that could influence WMT’s performance in the upcoming months.

Robust Financial Performance

For the fiscal 2024 second quarter that ended July 31, 2023, WMT reported revenue of $161.63 billion, beating analysts’ estimates of $160.27 billion. This represents a 5.7% year-over-year increase. Its adjusted operating income rose 8.1% from the prior-year quarter to $7.40 billion. The company’s consolidated net income was $8.05 billion, an increase of 56.5% year-over-year.

Furthermore, the retailer’s adjusted EPS came in at $1.84, compared to $1.77 in the previous year’s period and the $1.71 expected by analysts. Its free cash flow for the six months ended July 31, 2023, was $9 billion, representing an increase of $7.20 billion compared to the same period in 2022.

“We had another strong quarter. Around the world, our customers and members are prioritizing value and convenience. They’re shopping with us across channels — in stores, Sam’s Clubs, and they’re driving eCommerce, which was up 24% globally. Food is a strength, but we’re also encouraged by our results in general merchandise versus our expectations when we started the quarter,” said Doug McMillon, WMT’s President and CEO.

“Our associates helped deliver increases in transaction counts and units sold, and profit is growing faster than sales. We’re in good shape with inventory, and we like our position for the back half of the year,” McMillon added.

Walmart’s CFO, John David Rainey, said he feels better about spending patterns than he did three months earlier, yet he described the consumer as “choiceful or discerning.” He added that seasonal moments like the Fourth of July holiday and back-to-school have helped drive sales during the second quarter.

Upbeat Full-Year Guidance

WMT raised its full-year 2024 forecast as the retailer stays committed to its low-price strategy to draw grocery customers and boost online spending. The big-box retailer now expects…

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