Walmart (WMT 1.83%) stock fell over $13 per share, or around 10%, in after-hours trading on Monday after the big box retailer released a disappointing update for its second quarter and full-year fiscal 2023. The news shocked investors because Walmart isn't scheduled to report Q2 fiscal 2023 earnings until mid-August. Similarly, Target (TGT 1.74%) released an intra-quarter guidance cut in early June that sent its stock tumbling.
Walmart and Target aren't known to release such market-moving results in between earnings reports -- which adds a level of uncertainty to the broader stock market. However, there are reasons to believe that Walmart's guide down wasn't much of a surprise at all. And in many ways, it was easy to see coming. Here's how to digest Walmart's guidance cut and why the stock could be a buy now.
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Breaking down the update
Walmart now expects fiscal 2023 sales to be 4.5% higher than the prior year -- which sounds decent until you factor in the higher costs due to inflation. That effect is seen through the operating income guidance, which is expected to be down 11% to 13% in fiscal 2023 from the previous year. Similarly, adjusted earnings per share are expected to decline by 11% to 13%.
If Walmart's guidance comes in as expected, it will make for an ugly chart. 12% lower operating income would give Walmart $22.8 billion in fiscal 2023 operating income, nearly as low as the $22.6 billion it made in the heavily pandemic-affected fiscal 2021. Walmart's operating income would be 18% lower than the $27.7 billion it earned 10 years ago.
WMT Operating Income (Annual) data by YCharts
Walmart is expecting its full-year operating margin to be 3.8% to 3.9% -- which is below its 10-year median of 4.6%. Simply put, higher revenue isn't enough to combat rising costs.
The same story, just getting worse
Walmart is signaling continued margin pressure as input costs (such as labor, fuel, shipping and logistics, and product costs) continue to squeeze profitability. On top of that, there's a shift in product mix away from discretionary products toward consumer staples such as food and other basic household essentials.
Walmart's promise to its customers is to offer the lowest prices. Low prices mean low margins. However, Walmart tends to have higher margins on apparel than food, and then even higher margins on electronics, furniture, and other bigger-ticket products. These items were selling like hotcakes when consumer spending was strong in the calendar years 2020 and 2021.
However, this year is different. Walmart finds itself with too much inventory of products that simply don't have the demand they did a few quarters ago. On top of that, Walmart is facing a season shift from summer to fall and must discount summer goods to make room for the fall season.
The challenge for Walmart is that it has to predict customer demand months in advance. Supply chain disruptions and increased demand during the pandemic pressured Walmart and other retailers to order ahead of time and carry larger inventories. That's not a problem when consumer spending is on the rise. But when it's trailing off, that leaves Walmart backpedaling to reduce its current inventory and make sure it isn't over-ordering in case this holiday season is weaker than was initially expected.
NASDAQ: WMT
Key Data Points
Where to go from here
Walmart's announcement isn't particularly surprising, given management's commentary on the first-quarter fiscal 2023 earnings call. Rather, the news further underscores the harsh reality that Walmart's business could be in a slog for a while before it returns to growth.
In this vein, it makes sense that Walmart stock has sold off back toward its 52-week low. However, for investors looking for a blue-chip dividend stock to add to a diversified portfolio, Walmart's 1.8% dividend yield and market-leading position may be worth taking a look.
