Retail giant Walmart (WMT -0.87%) had a lot to say about the economy in Tuesday's earnings report. The management team used the words "inflation" and "inflationary" 39 times on the earnings call, ahead of popular terms such as "growth," "profit," and "prices." It's safe to say that economic pressure is affecting Walmart in many ways, and the inflation issue is a top priority right now.
Here are a few samples of Walmart's economic analysis from this week's earnings report and conference call. The themes these executives unearthed should be helpful for investors across the retail industry.
1. Consumer staples will sell, even if prices are rising
Walmart CEO Doug McMillon noted that prices are rising across a wide range of products, as you would expect in an era of red-hot inflation. The company is passing on its higher costs to consumers, resulting in massive changes to the product mix. The raw volume of food items being sold stayed stable in the second quarter, even though inflationary effects increased the cost per unit by double-digit percentages.
Other grocery stores are also experiencing the same price increases. As a result, many people are going to Walmart instead of pricier chains, and management claimed that the company gained market share in groceries during this quarter.
2. New clothes can wait, though
At the same time, Walmart experienced a dramatically lower demand for product categories such as apparel, electronics, and home goods. Warehouses and store shelves started to fill up with unsold clothing, TV sets, blenders, and patio furniture in the first quarter. In response, Walmart ran a handful of drastic discount programs in the second quarter to clear out the clogged storage spaces and make room for faster-moving items such as bathroom tissue and macaroni.
The aggressive approach we took to move through apparel, in particular, put financial pressure on us, but it helped relieve pressure on our stores and through our supply chain... Grocery sales mix increased nearly 300 basis points, whereas general merchandise sales mix decreased more than 350 basis points. This resulted in additional general merchandise markdowns in our U.S. business, particularly in apparel at a time when inventory clearance was already higher than expected in the industry.
3. The inflation crunch isn't over yet
Many of Walmart's economic findings suggested that basic prices continue to run higher as we speak. In other words, we haven't seen the last of the inflation crisis quite yet.
Let me give you a few examples:
- Walmart's updated full-year guidance was built on the assumption that the reshuffled product mix will stay unchanged through the second half of the year. Tight unit volumes plus double-digit price increases add up to a full-year sales target of approximately $499 million, slightly ahead of current analyst projections.
- The company is planning for tightened consumer belts well into the holiday season. "Having Thanksgiving meals in a position where you can buy an entire meal for under $50 for a family of 4 is exciting," said CFO John Furner. "So there's a value play, and there's a quality play. Wherever the customer goes and how things shift, we'll be ready to serve them."
- And the underlying price pressure from the bottom of the food chain has not gone away. "As we move through Q2, food inflation continued to tick up, and we continue to see a heavier mix of sales in food and consumables in many of our markets, and that put pressure on margins overall," McMillon said.
What Walmart's analysis means
The market analysis and financial results discussed above point to continued inflation pressure through the second half of 2022. Retailers, consumers, and investors should brace themselves for dealing with these issues.
At the same time, there are market-moving forces in action that are beyond Walmart's control. The management team never mentioned the recently passed Inflation Reduction Act, which aims to slow down the skyrocketing inflation trend. Not stop it or reverse it, mind you -- "reduction" is in the name, after all. Furthermore, energy prices are backing down from recent highs, which should reduce the costs of transportation across the entire economy.
So Walmart's analysis looks like a conservative take on the near-term future. Keep an eye on the retailer's top-line sales. In effect, the company's next earnings report should serve as a report card for the Inflation Reduction Act and other anti-inflationary measures. Walmart's business should perform a little better if these bills are making a significant difference. Otherwise, the retail veteran's next few reports should stick close to current targets -- or worse.