Walmart raises its horizons as shoppers look for good deals

Wal-Mart, the largest US retailer, raised its annual guidance on Thursday, a sign it expects shoppers to continue to gravitate toward its value-oriented stores as they become more selective about their purchases.

The retailer said it expects net sales to increase 3.5 percent for the fiscal year and operating income to increase to 4.5 percent.

Revenue in the first quarter was $152.3 billion, beating Wall Street’s estimate of $141.7 billion. Both transactions and the average amount spent by customers were up in the quarter.

Higher-income families and younger customers are shopping more at Walmart, the company said, reversing a trend its executives have called for in recent quarters as Americans face higher-than-usual inflation. The retailer said it also gained market share in the grocery category.

“We had a strong quarter,” Wal-Mart CEO Doug McMillon said in a statement Thursday.

On a call with analysts, Mr. McMillon said inflation was slowing consumer spending in discretionary categories such as apparel and household goods. This, in turn, causes uncertainty for Wal-Mart executives as they plan for the coming year.

“We all need these prices down,” McMillon said. “Persistently high rates of inflation in these categories, which persist for an extended period of time, are burdensome for some of the families we serve.”

This week’s retail earnings reports provided a glimpse into the mindset of the US consumer and the state of the industry. Target, Home Depot and TJX, which owns TJ Maxx and Marshalls, reported first-quarter earnings that showed sales moderated compared to a few years ago when shoppers spent more freely.

Home Depot on Tuesday lowered its guidance for the full year and said sales in the first quarter fell 4.2 percent from a year earlier. The executives said they expected 2023 to be a “year of sobriety” for the home improvement sector, but that the company underperformed expectations.

Target’s quarterly sales increased 0.5 percent. The retailer maintained its guidance for the full year, but said that “based on softened sales trends” in the most recent quarter, it was planning for a wide range of sales results in the second quarter.

Overall sales at TJ Maxx’s parent company were up 3 percent. Its TJ Maxx and Marshall brands, which offer shoppers brand-name items at discount prices, posted an increase, but sales at HomeGoods fell 7 percent. It maintained its guidance for the full year and expected a sales increase of 2 to 3 percent.

Analysts said the drop in sales was a sign that consumers are becoming more selective about what they buy, along with spending patterns gaining some semblance of normalcy after being less predictable during the pandemic. Overall, the economy has remained resilient, with strong wage growth and job additions across a wide range of industries.

“We are not seeing a collapse in revenue,” said Simeon Siegel, managing director at BMO Capital Markets. “We are seeing revenue disappointments. Consumers are still spending on things they decide they want to spend on.”

Retailers face a profit challenge. Wal-Mart said Thursday its gross profit rate, or the difference between the cost of goods and their sales, fell to 23.7 percent, slightly missing Wall Street estimates. The decline came in part because shoppers were buying more groceries, products in the health and wellness category, and fewer general merchandise. Grocery stores typically have lower profit margins to retailers than discretionary categories such as clothing.

Target said on Wednesday its gross margin rate rose to 26.3 percent from a year earlier, when it had an inventory glut and supply chain costs higher. It said higher prices also helped push that number up. But Target warned that “shrink,” the industry term for inventory that entered a store or warehouse but was left unaccounted for, would hurt its profitability by more than $500 million compared to last year.

Retail analysts expected the company’s margins to be lower this quarter, with more promotions being given to entice shoppers to spend and customers to buy more items such as groceries that bring lower profits.

This consumer behavior was reflected in this week’s retail sales report for the month of April. Retail sales rose by a modest 0.4 percent from March, reversing a two-month decline. (The figure is not adjusted for inflation and is sometimes revised.)

Department stores, health and personal care stores, and grocery stores all reported increases. Spending decreased at furniture stores, electronic stores, and home improvement retailers. Spending in restaurants and bars increased by 14.5 percent.

Restaurants and flights are usually considered discretionary, but they are also experiences, which Americans spend more on. There is less focus on buying expensive items for the home since many shoppers spent the early stages of the pandemic doing just that.

“Part of what we’re seeing now is a kind of rebalancing of the consumer budget,” said Michelle Mayer, chief economist at Mastercard. “As we look forward, do we expect this dichotomy between experiences and commodities to last forever? Of course not. But there is still more catching-up that needs to happen for some experience-based spending categories as consumers are still very eager to meet their ongoing demand.” .

However, some analysts warn that a combination of factors — including consumers having less savings, tightening credit and continued high prices — should cause shoppers to back off in the second half of the year.

A “very clear pattern” with retailers’ earnings results this week showed consumers were more mindful of what they bought, said Michael Lasser, retail analyst at UBS.

“My personal belief is that this will continue for the foreseeable future,” Mr. Lasser said. “What will greatly influence the direction of spending from there is what happens to the labor market.”

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