Walmart’s lousy quarter has us looking to exit our position in the retailer
Investing Club holding Walmart (WMT) reported terrible fiscal first-quarter 2023 results and disappointing full-year guidance Tuesday before the opening bell. The Dow stock more than 10% after the release Tuesday. Revenue rose 2.4% year over year to $141.6 billion, outpacing the $138.96 billion consensus estimate. But adjusted earnings of $1.30 per share missed the $1.46 per share expected by the Street. Bottom line Despite the strong top-line performance, a number of issues weighed on profitability. The list includes a combination of wage and fuel cost inflation that was compounded by an increase in container and storage costs. Sub-optimal execution on behalf of management was also to blame. They partially attributed the lackluster performance to how fast things moved in the back half of the quarter. You’ll recall that Russia invaded Ukraine a week after the company’s prior earnings release. Jim Cramer on Tuesday said : “The execution here is so poor, it’s embarrassing.” It remains to be seen if management can ultimately bring down some of the costs, pass some others through over time, and ultimately realize longer-term profit growth targets. On the earnings call management said, “We’re committed to our 4% top-line growth and greater than 4% profit growth algorithm. Our strategy and mid- to long-term financial plans support that despite the turbulence we’re managing through today.” That may be the case longer term, and management did take some time to discuss the benefits of their so-called flywheel of “mutually reinforcing businesses.” This quarter makes Walmart a show-me story as management must prove their ability to address input cost inflation and protect profit margins better than they did in the first quarter. However, we aren’t very interested in waiting around for management to show us that they can turn things around. So we’re downgrading the stock a 3 rating. That’s reflective of our desire to sell the position on any rally in shares. We see better opportunities in this beaten down market in companies that actually reported fantastic earnings results. Companywide results In addition to the headline numbers, Walmart reported adjusted operating income on constant currency (CC) basis of $5.3 billion in the quarter, below the $6 billion expected. (Constant currencies help strip out fluctuations in foreign currency to provide a clearer financial picture.) Walmart saw a quarterly operating cash outflow of $3.8 billion, far below estimates for a $10.48 billion inflow, and a free cash outflow of $7.3 billion, which missed the $8.78 billion inflow expected. Capital expenditures of $3.5 billion were a tad below expectations of $3.8 billion. As for shareholder returns, Walmart paid out $1.5 billion in dividends during the quarter and bought back $2.4 billion worth of stock. Guidance While the quarterly earnings miss was disappointing, it was the forward guidance that’s really weighing on shares Tuesday. Management reduced their full-year profit forecast despite increasing sales expectations. Fiscal 2023 sales are now expected to increase about 4% in constant currency, up from the “about 3%” growth guided to last quarter. Comparable sales guidance of slightly above 3.5% excluding fuel for Walmart U.S. also represents an increase from the “slightly above 3.5%” excluding fuel previously forecast. Unfortunately, that’s where the increases ended. Management now expects full-year consolidated operating income to decrease by about 1% CC, down from a 3% increase previously expected. As a result, earnings are now expected to decline by about 1% for the full year, a negative revision versus the previous guide to a mid-single-digit percentage increase. The excepted full-year effective tax was unchanged at 25% to 26% as was capital expenditures guidance for the upper-end of 2.5% to 3% growth. with a focus on supply chain, automation, customer-facing initiatives and technology. As for the second quarter of 2023, management expects sales to increase over 5%, better than expectations for 3.8% year over year advance. Driving the expected improvement, a 4% to 5% comp sales increase excluding fuel at Walmart U.S., better than the 3.6% increase expected by the Street. Unfortunately, as was the case with full-year guidance, second-quarter consolidated operating income and earnings-per-share guidance were both revised lower. Management now expects both to be flat to slightly up, down from the low- to mid single-digit percentage increase previously expected on both line items. Segment results Walmart U.S. revenue rose 4% year over year of $96.9 billion in fiscal first-quarter of 2023, beating expectations of $95.04 billion. As a result of gross margin and expense pressures — despite a slight offset from “solid growth in membership and other income” — operating income fell 18.2% to $4.5 billion, missing expectations of $4.78 billion. Comp sales excluding fuel for the quarter increased 3% year over year, with comp transactions coming in flat year over year, and the comp average ticket growing 3% year over year. Contributing to that comp growth was a low double-digit comp sales increase in grocery and high single-digit increase in health and wellness that was partially offset by a low double-digit decrease in general merchandise. Additionally, while e-commerce sales were up 1% year over year, they were up a solid 38% on a two-year stack basis. Taking a look at profitability dynamics, which is the focus given the bottom line miss, gross margin took a hit of 38 basis points (1 basis point equates to 0.01 percentage points), with three-quarters of of that attributable to “higher-than-expected supply chain costs, including fuel and eCommerce fulfillment,” according to the company. A mix shift toward grocery also weighed on profitability due partly to lapping last year’s stimulus payments, which supported higher-margin general merchandise sales in the year ago period. The operating expense rate was up 95 basis points, primarily as a result of wage inflation as Walmart experienced some overstaffing due to a need to higher additional employees to fill-in for ones out with Covid and then seeing those that were out, return alongside their temporary replacements. That said, on the call, management said, “[The] issue was resolved during the quarter, primarily through attrition.” Walmart International revenue of $23.8 billion for the quarter — down 13% or down 11.6% CC — missed expectations of $25.32 billion. Divestitures in the U.K., Japan and Argentina resulted in a $5 billion annual reduction. Excluding this impact, sales were up 6.3% or 8% CC. Additionally, gross margin and expense pressure compounded the top-line miss, resulting in a 35.3% decline in operating income to $800 million, missing expectations of $950 million. Walmex, which includes results from Mexico and Central America, saw sales for the quarter increase 10.4% year over year while sales in China advanced 7.2% and sales in Canada were up 6.9% versus the year ago period. On the call, management noted that their “biggest international pressure point is related to Covid lockdowns in China, which created operational and financial pressure.” Gross margin contracted 108 basis points with a third of that attributable to the divestitures noted above and the remainder “due to markdowns from slower sales growth, as well as ongoing growth in Sam’s Club and eCommerce sales in China,” the company said. Operating expense rate was up 12 basis points, as a result of the deleveraging. Sam’s Club revenue of $19.6 billion for the quarter beat expectations of $17.73 billion with comp sales increasing 17% year over year. Strength was seen in most categories, led by food and partially offset by weak tobacco sales. E-commerce sales in the quarter were up 22% year over year, driven by both direct-to-home and curbside. Membership income was up 10.5% year over year, with member count reaching a new record and Walmart+ penetration increasing by about 290 basis points to another all-time high. In the membership and other income line item, $1.3 billion beat expectations of $1.22 billion. The company’s global advertising, which is recorded either in net sales or as a reduction to cost of sales, depending on the nature of the advertising arrangement, was called out as being up more than 30%. (Jim Cramer’s Charitable Trust is long WMT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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