Walmart (WMT -0.74%) updated investors about its business outlook after the markets closed on Monday, reporting that consumer spending is shifting faster than it had anticipated. Among the side effects of the pandemic have been supply chain disruptions and global shortages that have raised prices on everything from groceries to fuel. That inflation has been further propelled by geopolitical issues, which have reduced the supplies of crude oil and natural gas reaching the market, pushing energy prices higher.
The result of this is that folks have less money for discretionary items like TVs, apparel, and other general merchandise of the types that they spent more heavily on earlier during the pandemic, when lockdowns and social distancing measures meant they were spending much more of their time at home. Walmart said it would have to mark down prices on those types of products to move its excess inventory. The stock closed Tuesday's session down by 7.6% in the wake of the announcement.
But now, that share price dip has some investors asking if this is a smart time to buy Walmart stock.
Walmart to cut prices on non-food categories
In Monday's press release, Walmart predicted that its earnings per share would fall by between 8% and 9% in its fiscal 2023 second quarter. It also forecast an earnings per share decline of between 11% and 12% for the fiscal year. Previously, management had been guiding for a 1% decrease in earnings per share in fiscal Q2, and for earnings to be in the range of flat to up slightly for the year.
However, Walmart also said that its comparable-store sales, which exclude the impact of new store openings and closings, will rise by 6% in fiscal Q2. That was higher than the previous expectation for comp sales to increase by 3.5%. This dynamic of rising sales and falling earnings is driven by changes in consumer spending. Price inflation means that households are spending a larger share of their budgets on food. Additionally, Walmart's profit margins on food are lower than its margins on general merchandise, and sales of those more profitable categories are slowing.
Walmart noted it would need to cut prices on categories outside of food and consumables to bring down the amount of excess inventory it had on hand. Since the pandemic began, demand had been exceeding supply at Walmart, so the company had been focused on procuring more inventory to meet consumers' apparently insatiable appetites. But now that the economy has reopened and inflation has soared, customers' shopping practices have changed.
Meanwhile, Walmart's inventory rose to $61 billion in its most recently completed quarter, which ended on April 30. That was up by nearly $15 billion from the $46 billion inventory it had at the same time the previous year. Given the mismatch between what Walmart has for sale and what consumers are buying, it's understandable that it would need to discount large swathes of its merchandise.
Not the best time to buy Walmart's stock
That said, it's unclear how sharply Walmart will need to cut prices to sell its excess inventory. Further, the stock price only fell modestly in response to the news, and based on its current price-to-earnings ratio of 26 or its price-to-sales ratio of 0.6, it's not historically cheap now. For those reasons, Walmart's recent stock price dip has not created a meaningful buying opportunity yet.