Consumers are not pulling back on spending despite rising prices on everything from groceries to pet food. That said, it does not look like businesses are through raising prices, indicating more pain ahead for households. 

Walmart's (WMT -0.15%) fiscal first-quarter 2023 results revealed a resilient consumer, but also how rising inflation is biting into profit margins for the world's largest retailer. Let's look closer at Walmart's Q1 earnings. 

Two people in an a grocery store aisle.

Image source: Getty Images.

Walmart's customers are still spending at elevated levels

In its first quarter of fiscal 2023, which ended April 30, Walmart reported net sales of $141.6 billion. That was up 2.4% from $138.3 billion during the same quarter last year. Recall that this time last year, consumers in the U.S., Walmart's largest market, were in more of a mood to shop after receiving stimulus checks. What's more, at this same time last year, there were plenty more business restrictions in place, which concentrated consumer spending to fewer establishments.

However, it was not all good news for Walmart in Q1. Expenses rose fast for the retailer, too quickly for it to pass along increases to customers. The coronavirus pandemic has snarled supply chains worldwide and has left little room for comfort. To make matters worse, the Russian invasion of Ukraine has restricted supplies further from already constrained levels.

And while the world may be approaching a more normalized lifestyle, COVID-19 is still circulating. That makes it harder for consumer-facing businesses where employees cannot work remotely. That's understandable. From a business perspective, raising wages by 15% may feel like a significant increase. From a workers' point of view, that may only amount to an extra $1 or $2 per hour. Meanwhile, the on-the-job risks significantly increased with the presence of a potentially deadly virus. 

WMT Total Expenses (Annual) Chart

WMT Total Expenses (Annual) data by YCharts

The factors mentioned above increased Walmart's cost of goods sold by $3.6 billion, or 3.5% year over year, and increased operating expenses by $1.3 billion, or 4.5%. Costs rose faster than sales and led to Walmart's earnings per share falling by 23.7% to $0.74 in Q1.

"U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected," said Doug McMillon, president and CEO of Walmart in the earnings release. "We're adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future."

What this could mean for Walmart investors 

The unexpected results in the first quarter changed Walmart's outlook for the rest of its fiscal year 2023. Robust consumer spending had Walmart raise its sales goal from a 3% increase to 4%. Meanwhile, the higher-than-expected expenses forced Walmart to lower its annual earnings per share target by 1% from the previous guidance for a mid-single-digit percentage increase. 

WMT Revenue (Annual) Chart

WMT Revenue (Annual) data by YCharts

Investors were not happy about the downgrade, and the stock has been down 7% since the announcement. Operating an international business that generates over $572 billion in sales is challenging, but even more so during a pandemic.