Walmart’s pain will be problem shared widely

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Shopping trolley is seen in front of Walmart logo in this illustration, July 24, 2022. REUTERS/Dado Ruvic/Illustration/

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NEW YORK, July 25 (Reuters Breakingviews) – When Walmart (WMT.N) sneezes, America reaches for its N95 mask. The supermarket colossus makes up nearly 10% of all retail sales, excluding cars and car parts, and is also the biggest private U.S. employer, with 1.6 million workers. So after it said on Monday that it would miss its profit targets because customers are rethinking how to spend, the result is a widespread problem.

The house Sam Walton built says earnings per share for the year could fall 13% short of last year’s figure. That’s just over 80 cents less than analysts were expecting, according to Refinitiv, equivalent to around $2.3 billion in total. Walmart’s stock fell more than 10% after the market closed, erasing about $35 billion of market capitalization, in a clear indication that what’s at stake is more than just a fallow year.

Walmart has two issues, both bad for its profitability: the goods its customers no longer want, and the goods they actually do. Its warehouses are piled high with merchandise that inflation-pinched shoppers no longer desire, notably clothing. The company had some $61 billion of inventory at the end of April, compared with around $44 billion at the beginning of 2020. Getting back to those more normal levels will be ugly and involve heavy markdowns, but not enough to fully explain the market reaction.

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Future spending also has shifted. Consumers are buying more food, which generates lower margins. The trend could stick. For perspective, Walmart’s gross margin — effectively what it keeps after paying its suppliers for products — is typically around 25%. A clothing merchant such as Gap makes closer to 35%, while a pure fast-fashion retailer like Hennes & Mauritz (HMb.ST) or Inditex (ITX.MC) easily reaches more than 50%. A customer dollar diverted from jeans to jello costs supermarkets dearly.

If a retailer as hardwired into the U.S. consumer’s soul as Walmart didn’t see this shift coming, its smaller peers are in for a rough time indeed. The company says it’s picking up market share in food, which means Chief Executive Doug McMillon is successfully passing some of the pain onto rivals already. Moreover, Walmart’s profit warning is an unambiguous sign that rising prices are forcing regular Americans to change their habits. Investors in U.S. consumer stocks will be doing the same.

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CONTEXT NEWS

Walmart issued a profit warning on July 25, saying that earnings per share would fall 13% in its fiscal year ending Jan. 31. The U.S. retailer had said in May that earnings per share would decline around 1%.

The company blamed rising food prices, which it said had affected customers’ ability to spend on items like clothing, leading it to cut prices.

Walmart shares fell around 10% after the market closed, giving it a market capitalization of around $327 billion.

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Editing by Jeffrey Goldfarb and Thomas Shum

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