Walmart Earnings Fall Short Thanks to Rising Gas and Food Prices

Walmart Earnings Fall Short Thanks to Rising Gas and Food Prices

Walmart is proving that even the nation’s largest retailer may not be immune to the economic pressures that are causing consumers to reevaluate their spending habits. 

Rising food prices meant more shoppers flocked to Walmart in the most recent quarter in search of grocery deals.
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The Bentonville, Ark.-based firm revealed quarterly earnings Tuesday before the market opened, improving on top-line revenues, but failing to meet Wall Street’s expectations after falling short on bottom-line profits. Company shares fell nearly 9 percent at the start of Tuesday’s trading session. 
“Bottom-line results were unexpected and reflected the unusual environment,” Doug McMillon, president and chief executive officer of Walmart, said in a statement. “U.S. inflation levels, particularly in food and fuel, created more pressure on the margin mix and operating costs than we expected. We’re adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future.”  

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For the most recent quarter, or the three-month period ending April 30, total revenues grew 2.4 percent to about $141 billion, up from more than $138 billion a year ago. Comp sales at Sam’s Club grew 10.2 percent, and 17.4 percent on a two-year stack. Membership income rose 10.5 percent. 
Walmart U.S. e-commerce sales increased 1 percent, or 38 percent on a two-year stack. Last August, McMillon said the company’s global e-commerce business was on track to reach $75 billion in revenues by the end of the year. The company still hasn’t said whether it has reached that goal yet.
Meanwhile, ​​net sales at Walmart International fell $3.5 billion during the most recent quarter, or 13 percent to $23.8 billion, negatively impacted by $5 billion, due to divestitures. The retailer logged $2.05 billion, down from $2.73 billion during last year’s first quarter, as a result. 
The results are a mixed bag. Walmart’s affordably priced food selection means consumers are increasingly flocking to the mass channel for their grocery needs. But McMillon added on Tuesday morning’s conference call with analysts that inflation is also lifting the average ticket price. Shoppers are responding by purchasing fewer discretionary items, resulting in smaller overall basket sizes. 
“As expected, consumers are increasingly drawn to the lower price points that Walmart can offer for groceries and Walmart is taking market share in food, but higher food sales is also putting pressure on gross margin,” Moody’s retail analyst Mickey Chadha wrote in a note. He added that the higher inventory levels “could lead to increased promotional cadence in the coming quarters if consumers continue to pull back, which could increase pressure on earnings. It is increasingly difficult to pass on higher prices to consumers while dealing with higher wages and employee costs.”
In terms of food costs, McMillon said there’s been double-digit inflation. “And I’m concerned that inflation may continue to increase. As it relates to Walmart U.S. general merchandise sales, we knew that we were up against stimulus dollars from last year, but the rate of inflation in food pulled more dollars away from [general merchandise] than we expected as customers needed to pay for the inflation in food,” he said.

Aside from rising consumer food and gasoline prices, executives on the call told analysts that additional headwinds came from higher-than-expected inventory levels (up 32 percent for the quarter, year-over-year), added fuel costs in the supply chain and increased labor expenses. 
“As the Omicron variant case count declined rapidly in the first half of the quarter, more of our associates [who] were out on COVID-19 leave came back to work faster than we expected,” McMillon said. “We hired more associates at the end of last year to cover for those on leave. So we ended up with weeks of overstaffing. That issue was resolved during the quarter, primarily through attrition.”
In addition, U.S. fuel cost the retailer more than $160 million more during the quarter than originally expected.

Doug McMillon, president and chief executive officer of Walmart
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Still, McMillon expressed optimism for the future. 
“Across our businesses, we had a strong top-line quarter,” he said. “There were some things that happened during the quarter that were different than we expected and we’re trying to be very transparent about those things. There seems to be more uncertainty now in a very fluid environment. And so, we’ll just deal with that.”
One way will be by slashing prices in high-margin areas, such as apparel, in an effort to manage excess inventory. While this might seem counterintuitive, McMillon said shoppers on a budget are more likely to notice. 
“Part of what’s at play here is [that] you’ve got food inflation moving up, but we’ve got general merchandise categories, like apparel and some of our hardlines categories, to play with,” he said. “And the beauty of it is [that] customers are even more price sensitive right now. They’re attention to fuel prices and high-food prices is high. And so when you bring [a price of] something down in sporting goods or hardware, one of these other categories, they notice even more than they would notice before and that makes the elasticity impact be different than it would be otherwise, which blends the mix up.” 
In addition, some tailwinds for the quarter included things like game consoles, as well as patio furniture, grills and gardening supplies, thanks to warming temperatures.

“In terms of the consumer themselves, we’ve seen strong growth with higher-income consumers, middle-income and lower-income, but we do see a definite strength with high-ticket items,” John Furner, president and CEO of Walmart U.S., said on the call. “With some consumers and others, we do see some switching, which would include switching specifically from brands to private brands. And where we see the switching from brands to private brands, we’ll continue to watch that for a group of customers, but we’ve got to all work harder to keep prices low for the American consumer.”
McMillon added: “It’s important to recognize that there’s more than one consumer. We serve the whole country. [With] the U.S. in particular, we’ve got a breadth of customers and they behave differently. [With] some customers, we are seeing some indications of change throughout the quarter, but that’s not true for all of them.”

Pieces from Walmart’s Love & Sports brand.
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Walmart has worked hard over the last few years to expand its assortment of merchandise, particularly in fashion. The big-box retailer now sells more than 1,000 third-party apparel, accessories, and beauty and wellness brands — such as Levi’s, Reebok, Free People, Jordache, Eloquii, Space NK and Kris Jenner’s home cleaning brand Safely — and continues to add to the scale and breadth of its portfolio of brands each quarter. Earlier this month, the firm expanded its distribution of period-panty brand Proof to approximately 4,000 Walmart stores.
In addition, Walmart has an extensive list of its own apparel brands, three of which are worth more than $2 billion, although the company declined to say which ones. The list includes sustainable innerwear and maternity brand Kindly, swimwear and activewear brand Love & Sports, and apparel brands Free Assembly and Scoop, of which luxury designer Brandon Maxwell serves as creative director.
“Maintaining price competitiveness is the key risk for Walmart in today’s inflationary environment,” Landon Luxembourg, senior analyst at research firm Third Bridge, wrote in a note. “As consumer wallets come under pressure, private brands will likely take the stage as consumers trade down from a pure decision of opting for lower-cost items. Walmart’s private brand portfolio, which was a focus area over the last four to five years, has now doubled its assortment. However, it has not grown consumer mind share and lack recognizability versus Target and Costco’s competing private assortment, which may be more sought after by consumers.”

Walmart anticipates current quarter revenues will increase more than 5 percent, excluding divestitures. U.S. comp sales are also expected to grow — between 4 percent and 5 percent — excluding fuel, while earnings per share are expected to be flat to up slightly, excluding divestitures.  
For the full year, the company expects net revenues will rise about 4 percent, excluding divestitures. Walmart U.S. comp sales are expected to increase roughly 3.5 percent, excluding fuel, while earnings per share for the year will decrease about 1 percent, excluding divestitures.
The company ended the quarter with $11.8 million in cash and cash equivalents and more than $32 million in long-term debt. 
Shares of Walmart, which closed up 0.11 percent Monday to $148.21, are up 6.7 percent, year-over-year.
“We don’t expect this miss to become a norm, seeing that Walmart has historically outperformed competition during tough economic times,” Arun Sundaram, senior equity analyst at CFRA Research, wrote in a note. His firm maintained its “buy” position on Walmart’s stock, but cut the 12-year price target by $3 to $162 a share. “The good news is most of these issues seem to be isolated to the quarter and margins should improve in the second quarter and the back half of the year as Walmart works through excess inventory and better matches pricing with costs.”

Walmart Continues to Grow; Expects E-commerce Revenues to Reach $75 Billion

Walmart Continues to Grow; Expects E-commerce Revenues to Reach $75 Billion

Walmart continues to make gains in a turbulent retail environment thanks to its growing e-commerce, grocery and domestic businesses.    
“We had another strong quarter in every part of our business,” Doug McMillon, president and chief executive officer of Walmart Inc., said in a statement. “Our global e-commerce sales are on track to reach $75 billion by the end of the year, further strengthening our position as a leader in omnichannel. We grew market share in U.S. grocery, added thousands of new sellers to our marketplace, rapidly grew advertising businesses around the world and we’re finding innovative new ways to commercialize our data and build technology. We have a unique ecosystem of products and services designed to serve customers in broader, deeper ways and we’re grateful to our associates for making it all happen.” 

Tuesday morning’s earnings results revealed total company revenues for the three-month period ending July 31 were up 3.3 percent to $141 billion, compared with nearly $138 billion a year earlier. Sales in the U.S. division increased 5.3 percent to $98.2 billion, up from $93.3 billion a year earlier. Revenues at Sam’s Club rose nearly 14 percent during the quarter, year-over-year, to $18.6 billion, up from $16.4 billion a year earlier. E-commerce sales in the U.S. rose 6 percent during the quarter, year-over-year, or 103 percent compared with 2019’s second quarter. Comparable grocery sales in Walmart U.S. were up 6 percent, year-over-year, driven by growth in stores. 

Across categories, things like grocery, health and wellness, apparel, automotive, travel, party supplies and back-to-school essentials, such as lunch boxes, backpacks and stationery, were in demand during the last three months, as consumers increasingly flocked to physical locations.
“Customer behaviors changed during the quarter as people were shopping with us more in stores than online,” McMillon told analysts on Tuesday morning’s conference call. “I think some people view stores these days as boring; we don’t. The good news for us is that we can serve them either way. And of course, they get to choose.
“We’re focused on, how do we do a better job with all the inputs related to omni?” the CEO continued. “And that’s hard work. And building digital products that marry e-commerce with stores takes more work than just building an e-commerce solution; [it] takes more time, takes more complexity, but that’s where the secret sauce is. And if we can continue to blur the lines so that customers and members can shop however they want to shop, whenever they want to shop, the output metrics that we sometimes measure of e-comm versus store growth, for example, they’ll be what they are. But this quarter is kind of a good example of the fact that we can be somewhat indifferent. We’re trying to build a model where we’re completely indifferent to top-and-bottom line [growth] as it relates to how people shop.”
Meanwhile, while in-store traffic continues to pick up steam, the e-commerce business holds its own with a sizable portion of overall sales. 
“In some periods, in-store shopping will lead the way, and in some, e-commerce will lead the way, while we’re always striving for more in each part of the flywheel,” Brett Briggs, executive vice president and chief financial officer, said on the call. He added that online shopping revenues are not only on track to reach $75 billion this year, but also $100 billion in the near term.

To help the business grow even further, Walmart will continue to make investments “all the time,” said McMillon. 
“We manage the short term and the long term,” he said. “As everybody knows, we’re a company that’s particularly focused on the long term, particularly focused on the top line, [in order to] manage the bottom line.
“The business is changing shape,” McMillon said. “And I think that’s the key. We’re not just buying and selling merchandise in Supercenters at this point. We’re changing how the company is comprised. If you look at — just imagine a bar charter revenue or a bar charter profitability — the mix is shifting. And that unlock, as we stick with it, creates a different financial equation than what we would have had years ago.”
Company headwinds included cost pressures in the supply chain, inflation and Walmart International, where revenues fell more than 15 percent to $23 billion, compared with $27.2 billion the same time last year. 
While markets such as India, China and Mexico are rapidly expanding, Briggs pointed out on the call that “international divestitures significantly affect year-over-year comparisons.
“In addition, the pandemic continues to create both tailwinds and headwinds for the business. U.S. government stimulus benefited sales this year and last year, but many international markets continue to be negatively affected by COVID-19 and related government operating restrictions. COVID-19 costs remained elevated, but significantly lower than last year.”
The company logged $4.2 billion in consolidated net income as a result, down from nearly $6.5 billion a year earlier. Shares of Walmart were up just 0.4 percent at the start of Tuesday’s session as a result.
“Walmart’s same-store sales growth was the weakest in six quarters,” Garrett Nelson, senior equity analyst at CFRA Research, wrote in a note. “We also think current quarter [earnings-per-share] guidance of $1.30-$1.40 may be considered a modest disappointment in light of bullish back-to-school spending expectations. We maintain a ‘hold’ [on Walmart stock] on concerns related to margin contraction from slowing same-store sales growth and rising cost pressures.”

Still, Walmart raised its full-year outlook. The company is expecting net sales to increase 6 to 7 percent for the year, or by more than $30 billion, with earnings per share to be in the range of $6.20 to $6.35 apiece. The retailer is also anticipating sales in its international division will decline by about 21.5 percent and 22.5 percent in constant currency.
“Stores continued to validate Walmart’s ongoing investments as they were the key driver of the $1 billion increase in U.S. operating income on $5 billion in increased revenue, which is particularly impressive given the strength in its lower margin grocery-equivalent business that continues to grow share despite its massive scale,” said Charlie O’Shea, Moody’s vice president. “The meaningful upping of guidance for Q3 confirms our view that Walmart will continue to run on all cylinders, leaning heavily on its stores as it remains one of the premier global retailers by any yardstick.”
The retailer ended the quarter with $39.5 billion in long-term debt and $22.8 billion in cash and cash equivalents. 
Shares of Walmart, which closed up 0.82 percent to $150.75 a piece, are up more than 11 percent, year-over-year.
Walmart is also requiring all U.S. teams above store and club level to be fully vaccinated by Oct. 4.

Michael Kors, Versace Parent Turns $121M Profit for First Gain in 3 Quarters

Michael Kors, Versace Parent Turns $121M Profit for First Gain in 3 Quarters

Capri Holdings Ltd.’s recovery cheered Wall Street during Thursday’s early morning hours after the retailer revealed better-than-expected quarterly earnings. 
The fashion group — parent company to the Michael Kors, Versace and Jimmy Choo brands — beat quarterly sales estimates and increased profits. Company shares rose more than 7 percent during Thursday’s session as a result.
“Our performance demonstrates the power and desirability of the Versace, Jimmy Choo and Michael Kors brands,” John D. Idol, Capri’s chairman and chief executive officer, said in a statement. “Through creativity and innovation, our luxury houses inspire excitement and passion, creating an emotional connection with our consumers. We are also attracting new consumers to each of our luxury houses as evidenced by the double-digit increase in our consumer databases.”

Total company revenues for the three-month period ending Sept. 26 declined 23 percent to $1.1 billion, down from $1.4 billion the same time last year. But Capri still managed to widen its profits to $121 million, compared with $73 million a year ago. A noticeable improvement from a company that lost a combined $731 million in the last two quarters. 
In the most recent quarter, Michael Kors, Capri’s largest business, had top-line sales of $793 million, down from more than $1 billion a year ago. The brand pulled in a profit of $190 million, down from $222 million last year. Versace, which the company bought in December 2018, had revenues of $195 million, compared with $228 million a year ago. Profits were $20 million, up from just $9 million last year. At Jimmy Choo, revenues were $122 million, compared with $125 million last year. The luxury footwear brand managed to break even, compared with a loss of $10 million a year ago. 

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While things like travel retail may be on the decline for the foreseeable future, Idol told analysts on Thursday morning’s conference call that luxury is making a comeback. 
“Consumers are spending at higher rates on luxury products as there has been reduced spending on experiences due to travel restrictions,” Idol said.
“Luxury is enduring, as it creates an emotional connection with consumers, inspiring excitement and passion in those who value design, innovation, as well as exceptional quality,” he continued. “The industry has proven resilient with sales, historically recovering rapidly following economic downturns and global health crises.”
By category, Versace showed strength in men’s wear and fashion athletic footwear, along with the Barocco V pattern, while Jimmy Choo sold out of its $5,500 Jimmy Choo x Timberland Swarovski crystal-studded boots almost immediately. The company expects the brands’ revenues to grow to $1 billion and $500 million, respectively, over the next several years.
At Michael Kors, large handbags and footwear, in addition to men’s accessories and outerwear, performed well during the quarter. 
“It’s really nice to see big backpacks selling again,” Idol said. “We see the greatest softness in women’s ready-to-wear and men’s ready-to-wear and that’s really across the group.”
Meanwhile, total company e-commerce sales increased 60 percent during the quarter, year-over-year. Other bright spots included positive sales in Mainland China during the last three months. (Idol said the fastest recovery is happening in Asia.)

“We continue to see opportunity in [Capri] and expect upward revisions on already inexpensive valuation to prove compelling,” Simeon Siegel, managing director and senior retail analyst at BMO Capital Markets, wrote in a note. “Notably, the Americas sales for Versace and Jimmy Choo were both up [year-over-year] as we continue to expect high-end consumers to help luxury spending in the absence of travel. Additionally, management highlighted positive global retail sales at Versace. We expect revenue to continue its improving trajectory.”
The company ended the quarter with $1.5 billion in long-term debt and $238 million in cash and equivalents. Capri has 1,261 brick-and-mortar units around the globe, including 828 Michael Kors stores, 227 Jimmy Choo stores and 206 Versace stores. Idol said the company plans on reducing its overall store count by closing unprofitable Michael Kors locations.
Capri is not providing forward-looking guidance, but Thomas Edwards, executive vice president, chief financial officer and chief operating officer of Capri, said on the call that the company expects revenues to decline by approximately 30 percent for the year.
“An improvement versus our prior expectations,” Edwards said. 
The fashion group also plans to reduce its exposure to wholesale — from about 30 percent of overall company revenues in 2019 to approximately 20 percent over the next few years — as the company continues to open Versace and Jimmy Choo stores and grow its e-commerce businesses.
“Our feeling is that in North America, digital will represent at a point in time over the next couple of years between 40 percent and 50 percent of the overall revenues for the brands in North America,” Idol said on the call. “[In] Europe, we don’t see that type of trajectory. We see something that will probably get us to a 30 percent level over the next few years. And in Asia, as you know, it’s a much smaller piece of the business today, low single digits. But we do think that that will kind of be in that 10 percent to 15 percent range again, over the next few years.
“The COVID-19 pandemic continues to profoundly impact the entire world,” Idol continued. “As the world continues to emerge from this crisis, we are increasingly optimistic about the outlook for the fashion luxury industry and Capri Holdings. We have an incredible portfolio of luxury houses, each with their rich heritage, exclusive DNA and strong brand loyalty. We are uniquely positioned to drive multiple years of strong growth as we continue to execute on our strategic initiatives.”
Shares of Capri Holdings are down nearly 32 percent year-over-year.

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