Despite reporting solid growth in sales and profits in the first quarter, Wall Street is not happy with the nation's largest retail chain. Shares of Walmart plunged 7 percent in after-hours trading and were down another 2 percent in morning trading, delivering the stock's worst one-day decline in three years as investors ignored the company's good news and zoomed in on the troubling bits.
Weak Forecast Hits Stock
According to analysts, it was the company's reiteration of a disappointing full-year forecast that really kneecapped the stock. Executives still see modest growth that remains well below Wall Street's expectations. But beyond Walmart's weak outlook, there were other troublesome signs buried in the earnings report.
Consumer Strain Evident
In its recent earnings report, McDonald's said that its sales are being driven by value meals, while competitors like Target and Kroger are slashing prices. Yesterday, Walmart warned that its results now depend on sales of low-price goods plus higher-income households trading down. Walmart CFO John David Rainey said that high-income shoppers were 'spending with confidence' while low-income consumers were 'navigating financial distress.' He also said that 'hundreds of millions of dollars of pressure from higher fuel prices' was a key reason the company kept its lower full-year forecast in place.
Just the morning after the market turned on Walmart, a widely watched consumer sentiment survey tumbled to a new record low, with respondents to the University of Michigan's May consumer confidence poll harping on higher prices and expensive gasoline.
Quarterly Performance
The big-box retailer's first-quarter sales rose more than 7 percent over the prior year, topping expectations, and net income rose nearly 19 percent year over year, while adjusted earnings per share only just met estimates. Rainey said that surging tax returns likely muted some of the impact of high gas prices, although investors wonder if this means consumer pressures will hurt the company even worse this quarter, given the absence of those rich tax returns.
Bright Spots
Online sales surged 26 percent, driven by strong demand for home delivery and the company's third-party marketplace business. Another bright spot is the Walmart+ membership business, which added a record number of new subscriptions in the quarter. Walmart+ offers free shipping for online orders, a streaming video platform and fuel discounts, competing directly with Amazon Prime, and the unit saw sales up double digits in the quarter. 'These new businesses are more profitable than traditional retail, which should help Walmart to grow its operating income faster than sales,' said Telsey Advisory Group's Joe Feldman.
Walmart's mixed quarterly report comes just a day after rival Target reported its best quarterly sales in nearly five years and TJX, parent of cult discount retailer TJ Maxx, delivered a blowout performance in the first quarter.
