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As prices on many goods have increased in recent months, even the most sophisticated retailers like Walmart have struggled to navigate the changes inflation has caused in consumer behavior.
Walmart showed on Tuesday that it is continuing to grapple with the issue, saying in its earnings report that, while its U.S. comparable sales increased 6.5 percent from the same point last year, its operating income dropped 6.8 percent.
The boost in sales for the quarter that ended July 31 was driven by shoppers’ buying necessities like groceries. That’s a sign that people are continuing to concentrate their spending on essential items — which often have lower profit margins — while curtailing spending in categories like electronics and apparel that they deem more discretionary. “We expect inflation to continue to influence the choices families make, and we’re adjusting to that reality,” Doug McMillon, Walmart’s chief executive, said on Tuesday during a call with analysts.
Walmart prepared Wall Street for the report last month, when it revised its full-year outlook and said it expected operating profits for the full year to fall as much as 13 percent. It also said it expected comparable sales to be up about 6 percent for the second quarter, which it was able to beat slightly.
On Tuesday, the retailer provided a somewhat improved outlook, saying it expected operating profits to decline between 9 and 11 percent for the full year. It also said it expected its U.S. comparable sales to increase about 3 percent in the second half of the year. The company’s share price was up more than 5 percent at the close of trading on Tuesday, one of its best days since 2020.
Walmart is also navigating higher than usual inventory levels for items that people are less willing to purchase amid higher food and gasoline costs. Consumers have felt some relief from inflation recently, with the average price of gas in the U.S. falling below $4 a gallon last week, the lowest level since March.
“Its core customers are price-sensitive, and because inflation has eroded their spending power, they are more unwilling to add nonfood items to their carts when they do their shopping,” Neil Saunders, the managing director of retail at GlobalData, said in an email. “Fortunately, Walmart is not losing this footfall entirely as it is retaining customers on the food side, but it has become less successful at driving consumers to shop multiple categories.”
While retailers’ sales volumes may increase this quarter, operating profits will show how successful companies are at carrying out their broader business strategies in the uncertain environment.
“What we’re watching now is how well can they manage through a very difficult time,” said David Silverman, a senior director at Fitch Ratings.
Walmart executives received several questions on the call with analysts about how the company was managing its excess inventory and price markdowns. John David Rainey, Walmart’s chief financial officer, said the retailer had canceled “billions of dollars” in orders. He added that inventory levels had peaked in the last quarter.
Retailers aren’t just dealing with the effects of inflation, Mr. Silverman said. They’re also building out their digital capabilities, trying to attract workers in a tight labor market and dealing with supply chain logjams. For some businesses, the challenging economic moment could result in missed opportunities to invest in their operations — and in long-lasting implications for their market share. A strong performance now would help position retailers for success during the crucial holiday season.
Walmart executives said lower-than-expected supply chain costs for the quarter had helped bolster results.
“They seem to be managing better, managing smarter through this period,” Mr. Silverman said. “And they will deal with this missed execution probably better than we’ll see others.”
Even still, the inventory struggles of major retailers have implications for the entire industry, said Mickey Chadha, the lead analyst at Moody’s covering Walmart. If Walmart is discounting to get rid of excess inventory, its competitors will follow suit.
“That’s going to impact margins across retail across the board,” Mr. Chadha said.
Walmart’s e-commerce sales in the U.S. increased 12 percent in the most recent quarter, and the company is looking at more ways to attract customers to its digital platform. On Monday, the retailer announced it had reached an agreement to include the Paramount+ streaming service as part of its Walmart+ membership package. Subscribers to Walmart+ pay $12.95 a month for perks that include free shipping and discounts on gas. The retailer has also had discussions with executives from Disney and Comcast about a potential deal that would bundle access to streaming entertainment with its membership service.
Home Depot, which also reported earnings on Tuesday, surpassed Wall Street’s expectations for sales and profits in its latest quarter as well. Richard McPhail, Home Depot’s chief financial officer, said that he saw demand for home improvement remaining strong and that the company is positioning itself to expand its market share.
During the pandemic, Home Depot has consistently outperformed analysts’ projections, and the company’s stock price was up about 4 percent on Tuesday. A decline in the number of second-quarter transactions combined with a significant rise in the average amount spent on each transaction suggested that some shoppers might be pulling back while professionals like contractors and builders are continuing to spend.
Still, retailers are receiving mixed signals on what shoppers are willing to splurge on. In July, Home Depot started selling its Halloween merchandise. The category is not a major one for the home-improvement retailer, which is better known as a purveyor of power tools and plywood. But, within hours, a 12-foot-tall skeleton had sold out.
“There aren’t many things more discretionary than a giant skeleton,” Mr. McPhail said in an interview, “so the customer is still an engaged one.”
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