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Walmart came out today with what is essentially a warning about the impact of inflation that is boosting sales – and it raised its sales guidance today – but is cutting into profit margins – and it lowered its earnings guidance.
In May, in its Q1 earnings call, Walmart said it had gotten caught on the wrong foot “by unseasonably cool weather” and other factors that left it overstocked with items “such as apparel, patio furniture, and landscaping supplies,” which is a classic retailer problem, to which Walmart reacted in a classic way, by lowering prices to get this stuff out the door.
Today, it came out with the diverging guidance for Q2: Higher sales, but lower profit margins, and lower earnings per share than indicated in May:
There was a dual message in the warning: We’re dealing with consumers’ reaction to raging inflation, and we ordered the wrong merchandise, and are having to cut prices on the wrongly ordered stuff, “particularly apparel,” to move it, and we’re moving it.
“Food inflation is double digits,” it said, which is corroborated by the CPI for Food at Home, which jumped by 12.2%.
“Customers are choosing Walmart to save money during this inflationary period, and this is reflected in the company’s continued market share gains in grocery,” it said.
With customers spending more money on “food and consumables” at Walmart, and with Walmart’s comparable sales increasing by 6%, the mix has changed toward food and consumables, and away from other stuff where profit margins are higher.
This shift in mix to food and consumables is “negatively affecting gross margin rate,” it said.
The other pressure on its gross margin is the effort to clear inventory of general merchandise, particularly items that it had mis-ordered and that consumers no longer wanted to buy, which means markdowns to move the stuff, “particularly apparel.”
While Walmart “made good progress clearing hardline categories” – presumably the patio furniture, landscaping supplies, etc. that it had pointed to in May – “apparel in Walmart U.S. is requiring more markdown dollars,” it said.
But back-to-school season is starting out OK, and Walmart is “encouraged” by the start on school supplies.”
It has by now been well documented month after month that consumers are shifting their spending back to discretionary services – such as travels, sports and entertainment venues, or elective healthcare services – where spending had collapsed during the pandemic. And the stimulus-fueled binge-spending on goods is reverting to pre-pandemic trends.
Retailers hugely benefited from this stimulus binge spending on goods, and now they are getting hit by this shift back to services. That much was expected all along.
Walmart pointed at another nasty effect of inflation: It’s a zero-sum game for households, and food comes first, and food-inflation is raging, so there is less money left over to spend on other stuff.
And there was a terse comment on the abating supply chain chaos: Walmart said it “made progress reducing inventory, managing prices to reflect certain supply chain costs and inflation, and reducing storage costs associated with a backlog of shipping containers.”
What we see here unfolding is the dual impact of, one, consumers shifting their spending back to services, from the stimulus-fueled goods-buying binge; and two, consumer struggling mightily to deal with this raging inflation, with food, gasoline, and rent eating up a bigger portion of the budget. Something has to give – and that may be apparel and patio furniture and other stuff that people had splurged on in the stimulus era.
At general merchandise retailers, such as Walmart and Target, inventories have jumped. Building materials and garden supply stores got just a tad heavy on their inventory. But grocery stores have finally gotten their inventory levels back up to normal, from the empty-shelves era. And at auto dealers, new-vehicle inventory is still stuck near record lows, and used-vehicle inventory remains a little lower than normal. Auto dealers make up about one-third of total retailer inventories.
This inventory glut exists in only a small-ish segment of all retailers — general merchandise retailers, which account for only about 10% of total retailer inventories — and with only part of their merchandise.
And overall inventories at all retailers put together, measured by the inventory-to-sales ratio (which largely excludes the effects of cost increases) is still way below normal (data through May from the Census Bureau):
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So we go from Inventory shortages to overstocks–overnight. Might it be that the folks who really never wanted to work anyway have switched from wanting stuff to wanting experiences (services?) And was it caused by the fact that our fearless leaders have trained an entire generation or 2 that they really didn’t have to work because we will forgive student loans, keep them from beng evicted as either homeowners or renters, give them free everythng, including thousands in helicopter money, and tell them it’s OK, just don’t look up?
Local Aldi stocked a lot of outdoor furniture at the beginning of the summer. They just started marking it down. I have been watching. A patio tent stack has only had 1 out of 20 sell all summer.
2020 and 2021 was the year of the backyard lawn. 2022 was about travel.
Turns out cowboy logic is a bit flawed when it comes to macro economics and generational affects on economic output.
“So we go from Inventory shortages to overstocks–overnight.”
RTGDFA and ALL of it, all the way down!!!!!!!!!!!!!!
I wrote it precisely so I wouldn’t have to read this BS in the comments. And sure enough, there it is, utter BS, hogging the first spot trying to hijack the comments.
Reading is easy, comprehension is hard
Hey Cowboy! Those stimies and bailouts have been even more for the owner class!
You do anyone who is an actual cowboy a disservice with that name. I suspect in your case, you are all hat and no cow, as we used to say in Oklahoma.
Bullwhip effect well and alive. Next 6 months will be interested, heard Nvidia is now also delaying their launch of the next generation graphics cards due to over supply of current gen and possibly producing too much of next gen.
Crypto mining rigs are suddenly no longer needed. And everyone bought a new laptop in 2020 and 2021, and they’re still working, so why buy another? But automakers still cannot get enough microcontrollers and trailing edge chips that cost $4 to go into rear-view mirrors.
And if you try to fly on vacation, expect to deal with mayhem because everyone is flying everywhere, because services are where people are now spending their money, not laptops.
LTT (Linus tech tips) also talked about automakers didn’t do themselves any favor either. They insisted on using older, less efficient design chips and fabs want to focus on latest generation instead due to economy of scale and overall higher demand/cost efficient. Couple that with the insane demand from Crypto before, really is a perfect storm.
For Nvidia though, I am ok with them taking a beating getting stuck with inventories and have to deal with the repercussion now. The way they bend their consumer base up the A$$ the last two years, it’s only a small sliver they get to enjoy now..
Right they insisted, and chipmakers insisted in focusing on the highest margin items. Something has to give. Markets get ugly, we’re just not used to having the consequences.
Phoenix: You are correct. Traditionally, the fab companies sell their six-year-old stuff the trailing-edge guys. It’s a moderately nice lifestyle, in that these chips were designed into various products and sales will continue to flow for decades, although at generally lower volume and lower unit prices. People who run trailing-edge fabs have a rather wry sense of humor.
“We make ’em like they used to!” What a great slogan.
The problem is that Moore’s Law ended in 2010, and all of the new processes have gone vertical, as in “finfets”. As a result, there is kind of a shortage of obsolete fabs which were originally built in 2014 and 2015: Those fabs are not actually obsolete, and are still producing SOCs, ASICs, etc.
The car companies were smart enough to notice that trailing-edge chips occupy a sweet spot on the cost-performance curve and make a lot of sense for intermediate-production-volume products like automobiles. Too bad that Moore’s Law ended and they are now stuck having to figure out how to get chips from an industry which really didn’t like them in the first place. So sad.
// And if you try to fly on vacation, expect to deal with mayhem because everyone is flying everywhere, because services are where people are now spending their money, not laptops. //
When will people no longer have the $$ to spend? I am curious. If this happens, perhaps the flight tickets price will come down?
“And at auto dealers, new-vehicle inventory is still stuck near record lows, and used-vehicle inventory remains a little lower than normal. Auto dealers make up about one-third of total retailer inventories.”
Of all industries, carmakers shat the bed worse than anybody. The numerous news stories about them hurrying up and canceling their chip orders right at the beginning of lockdowns seems to explain why everything else is now in plentiful supply – except new cars. For how long can these clowns continue to struggle? What a joke.
US auto manufacturing management is a clown show. It’s infinite demand for fuel efficient or electric cars and they’re barely able to make more expensive and inefficient trucks/SUVs, for want of $5 chips.
They can’t even figure out a way to pay $$$ to cut the line. Sure appliances manufacturers have bigger orders but I bet they would give up their spot for easy $$$. Everything can be bought, except for $5 chips. Then the sanctity of contract must be respected.
WSJ has an interesting article. Upper middle class getting squeezed. Things may get interesting if there really will be a recession and and Mr Yu has some of his renters quite paying rent for whatever reason.
Mark Yu (looks like he is in late 20s) had a profitable pandemic. Like many Americans, he added to his savings and pulled in big gains from the stock-market rally. He purchased a house in his new hometown of McAllen, Texas, then a duplex and an eight-unit apartment complex in Cleveland.
But 2022 hasn’t been so kind. His expenses have grown because of higher costs for gas, groceries and the dog food for his four German shepherds. The value of his stockholdings is shrinking. He is sending more money back to his family in the Philippines to help them cope with rising prices there. A cracked foundation in his new house cost tens of thousands of dollars to repair.
Mr. Yu, a 33-year-old who has lived in the U.S. since 2014, is now taking on credit-card debt and typically working seven days a week. Previously, he was socking away as much as $3,000 a month into a brokerage account. This year, a couple-hundred is the most he had been able to muster and he hasn’t put anything in for the past three months.
His story is similar to that of a number of upper-middle-class Americans who are seeing their two years of pandemic gains eroded.
Why do I have 0 sympathy for someone like him? Doubt and hopefully he is not asking for any but that living large mentality and complete obliviousness to the flipside is sadly way more common in consumer culture.
The part about sending money back to the Philippines offer some interesting insight.
oops. I guess he is 33.
So, setting aside the service vs. goods spending issue (complicated), if the thesis is that food inflation is biting into goods inflation, has there been anyone doing any deep dives into whether the food inflation is primarily driven by domestic vs. foreign causes?
My read of this USDA chart suggests that our exports are up, which is cool for US farmers, but I have no clue if that means inflation is being driven by UKR/Russian war and foreign issues, or if it’s mostly domestic inflation showing up at the grocery store. https://farmpolicynews.illinois.edu/2022/05/usda-forecasts-record-farm-exports-in-fy-2022/
Ironic if the the guys who seems to be doing pretty good during the Biden administration are domestic oil/gas producers and US farmers, while the Silicon Valley party got shut down by the cops. No wonder Dems want him gone, he made the wrong guys money.
The “Powers That Be” need to get a grip on reality. As inflation hits food, gas, and rent there is simply less money in the family budget for other things.
As Walmart said, people are spending more money in their stores… just not on things that have larger markups. It is going for groceries instead. I spent $41 there tonight and left with only three bags of groceries.
This is going to get worse before it gets better. My guess is that restaurants will be the next to take the hit… eating out two nights a week instead of three isn’t much of a sacrifice for families… but kills restaurant profitability.
“the mix has changed toward food and consumables, and away from other stuff where profit margins are higher.”
Unfortunately there is no law of the universe that says food has to be low margin. Farming/food production has decreased competition, more consolidation and now massive increases in fertilizer and gas prices to wipe out whatever independent folks are left. Never underestimate how evil these people can be.
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As the condo market is going south on you, you can always try to sell the tower to an investor to convert to rental apartments. But that’s tough too.
Shedding jobs, offices, and warehouses. It’s kind of sobering. Reality has that effect, after a drunken binge.
The startup and VC bubble is tied to a booming stock market, but stocks are unraveling, and that strangles the money flow.
Just when we thought the plunge in natural gas prices might take pressure off inflation, it starts all over again.
Raging inflation finally forces the ECB to abandon its reckless and absurd monetary policies and turn hawkish.
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