Food Over Fashion at Walmart, Hard Choices In Inflationary Landscape

Food is winning out over fashion at Walmart Inc., which issued a jarring profit warning on Monday, noting that customers are having to make some tough choices with inflation at levels not seen in 41 years. 

“Food inflation is double digits and higher than at the end of the first quarter,” Walmart said in a statement. “This is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel.” 

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Investors took the warning to heart and sent Walmart’s stock down 9.1 percent to $120 in afterhours trading, erasing $32.9 billion from the firm’s market capitalization in an instant.

Walmart is now expecting its adjusted earnings per share to drop 8 percent to 9 percent in the second quarter, a big step back from the flat to slightly up performance seen as recently as May 17. For the full year, adjusted EPS is expected to be down 11 percent to 13 percent, as opposed to the 1 percent decline previously seen.  

Sales, in contrast, are actually going to be higher than anticipated, but with a “heavier mix of food and consumables” pushing margins down. 

The firm said its second-quarter net sales would grow by 7.5 percent, above the 5 percent previously projected. The year is now slated to come in with a 4.5 percent gain, above the 4 percent seen earlier. 

Additionally, the top line is fighting currency headwinds of about $1 billion in the second quarter and an additional $1.8 billion in the second half. 

“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” said Doug McMillon, Walmart’s president and chief executive officer. “We’re now anticipating more pressure on general merchandise in the back half; however, we’re encouraged by the start we’re seeing on school supplies in Walmart U.S.”

Walmart CEO Doug McMillon - Credit: Mark Lennihan/Courtesy Photo

Walmart CEO Doug McMillon – Credit: Mark Lennihan/Courtesy Photo

Mark Lennihan/Courtesy Photo

The fashion industry in general has been fighting mightily to get away from the decades-long promotional cycle that had retailers and brands cutting prices to move goods and losing margins. 

But while companies higher up the price scale — from Ralph Lauren and Michael Kors to Hermès and Louis Vuitton — have been pushing brand and craftsmanship to maintain elevated prices, markdowns are clearly taking hold in the value realm. 

The question is how aggressively Walmart competitors like Target or the online giant Amazon are using markdowns to push goods and if the pressure starts to move up the retail ladder.

As of now, more well-to-do consumers are continuing to spend, but merchants are watching the horizon, worrying over a possible recession and keeping their fingers crossed.

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