On Friday, October 16, 1987 -- the trading day just before "Black Monday" -- shares of superstore chain Walmart (WMT 1.32%) suffered their steepest one-day decline ever, falling 11.7% in a single day. So here's the good news: This week wasn't quite that bad.
It was bad enough, though. On Tuesday after reporting its fiscal first-quarter 2023 earnings, shares of the world's biggest retailer crashed 11.4%. And at first glance this seemed to happen for the most mundane of reasons -- Walmart "missed earnings."
Image source: Walmart.
Expected to report a $1.48 per share profit, Walmart instead reported $1.30 per share, pro forma. Walmart actually beat analyst projections on sales, however, reporting $141.6 billion in revenue, ahead of the Street's expected $138.9 million -- but investors didn't care about that. Were market makers acting irrationally, though, crashing Walmart's stock price because of one single weak quarter?
Not necessarily. It turns out this quarter was exceptionally weak.
Walmart's earnings -- and cash -- both slump
In addition to missing the pro forma number, Walmart suffered a 24% year-over-year decline in profit per diluted share when calculated according to generally accepted accounting principles (GAAP).
That's a bit convoluted, but the upshot is this: Walmart earned $0.97 per share, GAAP, in fiscal Q1 2022. In Q1 2023 that number dropped to just $0.74 per share. As a result, the company is currently valued at a pricey 27.8 times trailing-12-month earnings, even after Tuesday's sell-off. And with Walmart predicting that earnings this year will decrease (about 1%) rather than increase, that high price-to-earnings ratio looks even more expensive.
And the news gets worse. "Profits," it turns out, are the least of Walmart's problems. You see, Walmart didn't generate any cash from operations at all this past quarter, instead consuming $3.8 billion. Add in $3.5 billion in capital spending, and Walmart's free cash flow for Q1 was a dishearteningly negative $7.3 billion.
In a post-earnings conference call, management explained away the lack of cash flow, saying it spent heavily to build inventory in the quarter, and that the cost of its inventory was further elevated due to inflation. Regardless of the reasons, it's worth pointing out: Prior to this quarter, it had been nearly a decade since the last time Walmart suffered negative free cash flow of any amount, much less $7.3 billion. And Walmart hadn't experienced negative cash from operations since Q3 1995, more than a quarter-century ago, according to historical data from S&P Global Market Intelligence.
Viewed in that context, Walmart CEO Doug McMillon's bluster that at least "we had a strong topline quarter" rings a little hollow. And viewed in that context, it's no surprise that Walmart's prediction it will grow its sales by another 4% this year didn't make investors any happier.
