Walmart Has ‘A Lot of Trepidation’ About Economy, as Consumers Feel ‘Very Pressured’

People shop at a Walmart Supercentre amid coronavirus fears spreading in Toronto, Ontario, Canada on March 13, 2020. Carlos Osorio/Reuters

Walmart is concerned about the U.S. economic outlook this year after its latest earnings projections showed that consumers were under heavy pressure.

Shares of the retail giant rose 0.4 percent after the big-box retailer gave its weaker-than-expected outlook for the year ahead.

The world’s largest retailer saw its full-year earnings forecast (pdf) fall below estimates, as tight consumer spending due to high inflation, may lead to pressure on profit margins.

“The consumer is still very pressured,” Walmart CFO John David Rainey told CNBC.

“And if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.”

Skyrocketing consumer, rental, and food prices are raising fears among investors that the Federal Reserve will continue to hike borrowing rates to slow the U.S. economy, which may lead to a recession by the end of 2023.

Last week Loretta Mester, president of the Federal Reserve Bank of Cleveland, said that more rate hikes may be necessary to cool down inflation.

Retail Giant Fends Off Price Hikes By Suppliers

The retailer continues to protect its customer base, by combating attempts by its product suppliers to hike prices.

“There’s still a lot of trepidation and uncertainty with the economic outlook. Balance sheets are continuing to get thinner, savings rate is roughly half of what it was at a pre-pandemic level and we’ve not been in a situation like this where the Fed is raising at the rate that it does,” Rainey told Reuters in a separate interview.

“So, that makes us cautious on the economic outlook because we simply don’t know what we don’t know,” the CFO added.

Meanwhile, Walmart CEO Doug McMillon, told investors on a post-earnings call, that he expects that “stubborn inflation” regarding dry goods, would have a “mixed” impact this year.

McMillon previously complained about manufacturers’ intent to raise the price of their products in a meeting with investors in December.

Key suppliers like Procter & Gamble and Nestle, have warned of further price hikes this year.

Walmart, which operates more than 5,000 stores throughout the United States, has been attempting to negotiate better prices from suppliers, while beating off competition from rivals such as Target.

Rainey said that although they recognize that suppliers are dealing with elevated costs, the company will use data and leveraging metrics, to improve its negotiating edge over suppliers to keep prices low for consumers.

Walmart Sees Gains in the Fourth Quarter

Walmart still reported strong demand in the final quarter ended Jan. 31, with a total revenue of $164.05 billion, a 7.3 percent year-over-year increase worldwide.

The report predicts that earnings for 2023 will hit $5.90 to $6.05 per share through January 2024, well below the previous estimate of $6.50 per share, according to Refinitiv IBES data.

Adjusted earnings per share came in at $1.71 for the period, well above the $1.51 average expectation.

For now, it appears that “customers are still spending money,” according to McMillon, while noting that ”it’s obviously not as clear what the back half of the year looks like,” he added.

“We’re gaining share across income cohorts, including at the higher end which made up nearly half of the gains we saw in the U.S. again this quarter,” he said.

Walmart’s affordable grocery prices have attracted new customers across income levels, as it made gains into the lower- and middle-income shopper bracket due to inflation.

Cost-conscious Americans are increasingly shifting toward buying food and consumables over general merchandise, which is likely to have a negative effect on company margins this year, said Rainey.

Toys, electronics, home, and apparel are expected to see a decline in demand.

Walmart executives expect domestic same-store sales throughout the country to rise between 2 and 2.5 percent, for the upcoming fiscal year, excluding fuel.

Outside of fuel, Walmart is also gaining a greater share of the consumer market through its Sam’s Club unit, which saw sales rise 12.2 percent in the fourth quarter.

Walmart has also been able to make some progress with the glut of unsold goods which piled up in storage or on clearance racks last year.

Inventory is now roughly flat compared to a year ago and is down 3 percent for Walmart locations in the United States, said Rainey.

Comparative sales at U.S. Walmart locations rose 8.3 percent for the last quarter, while American e-commerce sales jumped by 17 percent year over year.