Walmart raises forecast due to strong demand from inflation-hit shoppers

Walmart reported better-than-expected second-quarter results and raised its annual forecast as inflation-hit shoppers flocked to the company’s low-cost food, clothing and home goods.

Walmart shone thanks to its affordability, with comparable sales (excluding fuel) rising 4.2% in the second quarter from the same period last year, beating expectations.

The company’s online sales rose 22 percent in the U.S. – and customers spent more than usual: transactions increased 3.6 percent, and average spending increased 0.6 percent compared to the same period last year.

Sales at Walmart’s Sam’s Club hypermarket chain rose 5.2 percent, in line with expectations.

“Everyone is relieved that Walmart’s results mean everything is OK for the consumer. But a lot of higher earners are switching to Walmart and are therefore trying to save where they can,” Brian Yarbrough, an analyst at Edward Jones, told the Washington Post.

Shares of the Arkansas-based retail giant rose 6.7 percent to a high of $74.07 a share after releasing the strong earnings report on Thursday.

Before this jump, the company’s share price had risen by around 30 percent so far this year – outperforming the S&P 500’s growth of 15 percent.

Walmart reported adjusted earnings per share of 67 cents, beating LSEG analysts’ expectations of 65 cents.

The retailer reported revenue of $169.34 billion, beating analysts’ estimates of $168.63 billion and up nearly 5% from the same period last year.

The Arkansas-based company raised its revenue expectations to 3.75% to 4.75% from 3% to 4%.

The company raised its earnings per share forecast to $2.35 to $2.43 from $2.23 to $2.37.

“The only places anyone is shopping right now are Amazon, Walmart and Costco,” Michael Baker, an analyst at DA Davidson, told CNN.

The retailer took steps to meet the needs of its cash-strapped customers, increasing its advertising efforts and launching a food brand called Bettergoods, which sells meals such as chicken wings and frozen pizza for less than five dollars.

Walmart is also benefiting from the fact that consumers are looking for cheaper alternatives to fast food – an industry that is struggling to win back customers surprised by the price shock.

McDonald’s, Burger King and other fast-food giants are competing to introduce cheaper menus in order to boost weak sales.

“It’s clear that customers are moving toward preparing more meals at home rather than eating out,” Walmart Chief Financial Officer John David Rainey told CNBC.

According to analysts, prices at Walmart are about 25 percent lower than in conventional supermarkets.

Sales of merchandise such as lawn and garden supplies also rose slightly – the first growth in 11 quarters, which Rainey called an “encouraging sign.”

The CFO said Walmart has noticed a positive change in consumer sentiment over the past year.

Rainey said each month of the quarter was “relatively consistent” and that the back-to-school season was “off to a pretty good start” – even though the data predicted one of the most expensive back-to-school shopping seasons yet.

“We are seeing our members and customers remain selective, discerning and appreciative, focusing on things like essentials rather than unnecessary items. Importantly, however, we are not seeing any additional impact on consumers’ health,” Rainey said.

Walmart’s earnings rose due to increased sales, not price increases, he said.

After customers were overwhelmed by price increases at other grocery stores, restaurants and retailers, they turned to Walmart.

A weak employment report for July – which showed a sharp increase in unemployment – ​​further exacerbated the situation, leading to chaos and a massive sell-off in the markets.

However, inflation is cooling down. In the US, inflation rose by 2.9 percent last month compared to the previous year, slightly below expectations.

And retail sales rose 1.0% in July – the biggest increase since January 2023, after a 0.2% decline in June.

But even though the U.S. is not currently in a recession, three out of five people believe it is, according to a new study.

Net income fell to $4.5 billion, or 56 cents per share, compared to $7.89 billion, or 97 cents per share, in the same period last year.

While Walmart saw a steep increase, competitors like Home Depot have drastically cut their sales forecasts.

The hardware store chain attributed its poor earnings in the second quarter to high interest rates and fears of a stock market crash.

Home Depot CFO Richard McPhail told CNBC on Tuesday that consumers have developed a “procrastination mentality” since the middle of last year and are therefore spending less on home improvement projects.

“They are postponing their payments because they feel there is greater uncertainty in the economy,” he said.

According to retail analyst Hitha Herzog, Walmart has succeeded in appealing to consumers by offering particularly low prices for everyday goods.

“Why go to Home Depot for paper towels when you can get them delivered to your home for 25 percent less and possibly even for free – and Walmart offers that,” Herzog, research director at H Squared Research and part-time lecturer at the Parsons School of Design, said in a statement to the Post.

Home Depot shares rose 4.4 percent, compared to Walmart’s 37.6 percent growth year to date.

Walmart’s gains in categories such as home goods, clothing and appliances have come at the expense of other companies, particularly Target, which has seen weak sales in recent quarters, Yarbrough told the Washington Post.

Target shares have fallen 1.30% so far this year.

While Walmart raised its full-year forecast, it warned that second-half results may fall short of Wall Street expectations.

Walmart expects third-quarter adjusted earnings of between 51 cents and 52 cents per share, below analysts’ expectations of 54 cents. And analysts’ earnings estimates are at the high end of Walmart’s forecast.

Rainey said the retailer did not raise its second-half forecast because a number of factors could significantly impact the market this year – including the 2024 U.S. election and tensions in the Middle East.

“In this environment, it’s responsible or prudent to be a little cautious on the outlook, but we’re not forecasting a recession,” he told CNBC.