3 Reasons Walmart Now Expects Tough Ground for General Merchandise

Bentonville, Ark. –Walmart Inc. cut its guidance last night for the second quarter and full fiscal year. Here’s why.

Food inflation. Food inflation is in double digits and higher than at the end of the first quarter. This reduces customer spending in general merchandise categories.

Brands. Slower general merchandise turnover requires more markdowns to browse inventory, especially apparel.

Product mix imbalance. On the positive side, Walmart is gaining market share in groceries as consumers seek higher prices on food. As a result, Walmart US model sales, excluding fuel, are expected to be around 6% for the second quarter, which is higher than expected. However, the heavier mix of food and consumables negatively affects the gross margin rate.

“We now expect more pressure on general commodities in the second half; however, we are encouraged by the start we are seeing on school supplies at Walmart US,” said Doug McMillon, president and CEO of Walmart Inc.

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Although Walmart US has made progress in eliminating hardline categories and apparel, it is taking on more markdowns than expected, he said. The company is also reducing inventory, managing pricing to reflect supply chain costs and inflation, and reducing storage costs associated with a backlog of shipping containers.

Outlook not entirely gloomy

Walmart’s full-year guidance updates still predict revenue growth. And the company stands by its expectation that Walmart’s U.S. component sales, excluding fuel, will grow about 3% in the second half of the year.

His current orientation projects:

  • Consolidated net sales growth for the second quarter and full year is expected to be approximately 7.5% and 4.5%, respectively. Excluding disposals, consolidated sales growth for the full year should be approximately 5.5%.
  • Net sales include a foreign exchange headwind of approximately $1 billion in the second quarter. Based on current exchange rates, the company expects a $1.8 billion headwind in the second half of the year.
  • Operating profit for the second quarter and the full year is expected to decline 13% to 14% and 11% to 13%, respectively. Excluding the divestments of its UK and Japanese operations in the first quarter, operating profit for the full year is expected to fall 10% to 12%.
  • Adjusted earnings per share for the second quarter and full year are expected to decline approximately 8% to 9% and 11% to 13%, respectively. Excluding disposals, adjusted earnings per share for the full year are expected to decline by 10% to 12%.

In early June, executives said Walmart’s discretionary inventory glut was still being worked out, a process that is expected to continue midway through the third quarter. However, the company sounded more optimistic at the time, saying that despite the inflationary environment, it would continue to grow revenue.