Walmart (WMT 0.05%) delivered strong results in its fourth-quarter earnings report.
The retail giant posted strong top-line growth due to inflation and a solid increase in traffic as consumers look to the company to save money in tough economic times.
Comparable sales at Walmart U.S. stores rose 8.3%, and overall revenue was up 7.3% to $164 billion, easily beating the analyst consensus at $159.8 billion.
Gross margin fell by 83 basis points, a reflection of a sales mix shifting to lower margin areas like groceries. And Walmart increased markdowns to clear inventory. Still, the company delivered growth on the bottom line as adjusted earnings per share (EPS) increased from $1.54 to $1.71, which easily beat estimates at $1.51.
However, Walmart's guidance indicated that the company expected to face pressure in 2023 due to inflation, recessionary headwinds, and more cost-conscious consumers.
For fiscal 2024, Walmart expects a constant-currency revenue increase of 2.5% to 3%, including 2% to 2.5% comparable sales at Walmart U.S. stores. On the bottom line, the company sees adjusted EPS of $6.04 to $6.19. That's actually down from the $6.29 in adjusted EPS the company reported in fiscal 2023 and worse than the analyst consensus at $6.50.
Image source: Walmart.
The squeeze is on
CEO Doug McMillon said on the earnings call that guidance for the current fiscal year takes into account "stubborn inflation in dry grocery and consumables" and factors in a high degree of uncertainty as well as pressure on the consumer.
Walmart isn't the only one getting squeezed by inflation. The issue affects stakeholders up and down the value chain, including customers, suppliers, and commodity producers.
As the largest retailer in the world, Walmart is often the biggest customer, or one of the biggest customers, for many of the world's top consumer packaged-goods (CPG) companies, including Coca-Cola (KO 0.03%), PepsiCo (PEP -0.24%), and Procter & Gamble (PG -0.66%).
One of the company's strategic priorities in 2023 is to push back on higher prices from suppliers who have been trying to pass along increased commodity costs as Walmart wants to protect its market share, margins, and reputation for low prices.
Walmart is also leveraging its own private-label products to consumers and said increased private-brand penetration helped drive comparable sales in the Walmart U.S. grocery segment up in the mid-teens.
The retailer is sending a message to its suppliers, saying it won't tolerate price hikes as many big CPG companies passed along substantial price increases last year. That approach could trickle through the CPG industry, pressuring suppliers like P&G to pump the brakes on prices or cede more volume. A retailer like Walmart controls things like shelf space, endcap displays, and online listings, and can downplay certain products if suppliers don't cooperate, or it could simply stop ordering certain products if they're too expensive, which Walmart did with some Campbell Soup items.
What it means for consumer staples dividend stocks
Stocks like P&G, Coca-Cola, and Pepsi are popular among dividend investors as they have long histories of raising dividends and are seen as "recession-proof" companies whose products consumers buy even in tough times.
Many of these stocks outperformed last year as investors moved into safer, dividend-paying stocks to adapt to the rising interest rate environment, and as a result, they're now expensive.
KO PE Ratio data by YCharts.
As you can see from the chart above, all three of those consumer staples stocks trade at a premium to the S&P 500, which currently trades at a price-to-earnings (P/E) ratio of 21.
All three passed along significant price hikes in 2022, with Coca-Cola's average selling price up 11% and PepsiCo's up 14%, while volume growth was stagnant or down in some cases. P&G raised prices by 9% in its most recent quarter, but volume sales fell in all five of its product segments as management complained of rising costs.
CPG companies can't raise prices by double digits forever, and Walmart's refusal to cooperate is likely to have an impact, especially if these brands are worried about losing shelf space and a valuable sales channel. Additionally, recession-wary consumers may seek to trade down if they believe prices on name-brand goods get too high.
Stocks like PepsiCo, Coca-Cola, and P&G are expensive for a reason right now. Investors value their stability, but with Walmart calling out their price hikes and consumers becoming more price-sensitive, investors can find better dividend opportunities elsewhere, especially considering that these stocks came into 2023 already trading at a premium.
