ECONOMY

Sales and profits boost helps Walmart lift earnings outlook

Walmart offset heavy markdowns and higher wages to produce stronger than feared sales and profits in the three months to July, allowing it to forecast a smaller decline in earnings for the full year than it had told investors to expect just three weeks ago.

The US retailer’s reported earnings of $1.88 a share for its fiscal second quarter were up 24 per cent year on year and exceeded the $1.62-a-share consensus estimate from Wall Street analysts, who had cut their expectations after two profit warnings since May. Adjusted earnings were $1.77 a share.

Coming on the back of an 8.4 per cent increase in revenues to $153bn, however, the figures showed the impact of inflation’s pressures on Walmart consumers, many of whom have cut back spending on other items as fuel and grocery prices have risen.

“The actions we’ve taken to improve inventory levels in the US, along with a heavier mix of sales in grocery, put pressure on profit margin for [the second quarter] and our outlook for the year,” noted Doug McMillon, Walmart’s chief executive, as it reported that markdowns and the changed composition of US sales had driven a 132 basis point decline in its gross profit margin.

However, he added that it had made “good progress” on cutting costs in its supply chain “and that work is ongoing”. Operating expenses as a percentage of net sales were down 45 basis points, despite a higher wage bill in the quarter.

Walmart’s stock had fallen by 10 per cent since mid-May, when it suffered its biggest one-day fall since 1987 after warning that the rising prices of fuel and groceries were affecting sales of general merchandise in its US stores. In July it lowered its forecast for full-year profits again, noting that it was having to offer large discounts to clear excess inventory.

Its inventories hit $60bn at the end of July, up 25 per cent from $47.8bn a year earlier.

Walmart said it now expected a 9 to 11 per cent decline in operating income over the full year, compared with its guidance last month that investors should expect a decline of 11 to 13 per cent.

Excluding divestitures and assuming continued inflation but “generally stable” US consumer spending, full-year sales should be up by about 5.5 per cent, it said.

Operating income from Walmart’s US stores fell by 6.7 per cent in the second quarter, while its smaller Sam’s Club warehouse stores reported a 35 per cent drop in profits. Its international business delivered a 21 per cent increase in operating income, however.

Investors welcomed the improved outlook, helping push Walmart shares 4.2 per cent higher in pre-market trading in New York on Tuesday.

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