Wal-Mart’s earnings highlight a tough retail spring

Same-store sales in the United States rose 7.4%, ahead of analyst estimates of 5.5%.

“We had a strong quarter. Globally, corporate sales were strong, with e-commerce up 26%,” CEO Doug McMillon said in the earnings release. “We raised expenses, expanded operating margin, and increased profit before sales.”

The retailer also raised its financial forecast for fiscal 2024. The company now expects adjusted earnings of $6.10 to $6.20 per share, while analysts surveyed by FactSet expected $6.14. Revenue for the year is now expected to increase by about 3.5%.

Guidance for the current quarter was below consensus. Wal-Mart said it expects second-quarter earnings of between $1.63 and $1.68 per share. Analysts surveyed by FactSet had expected a dividend of $1.71.

The stock rose 1.6% in pre-market trading.

This is no surprise. Other stores offered a more mixed picture of consumer demand, while Walmart’s full-year report and forecast were unequivocally strong, driving up expectations that Wall Street had before the numbers fell.

Ahead of Walmart’s results, retail earnings season was off to a muted start. Target (TGT) posted earnings that were better than expected, though the big-box company sounded cautious about its financial outlook. And retailer TJX off-price

Cos. (TJX) also has a pessimistic outlook for the second quarter. Both stocks zigzag in response to the results.

Target and TJX focus more on discretionary products like clothing, a category that has taken a hit because inflation forces shoppers to spend more on essentials like food. Even Home Depot (HD) noted weakness in discretionary sales when it reported results on Tuesday.

Walmart, by contrast, excels at selling essentials, which is why it has earned its reputation as a more defensive retailer. This appears to be a better bet, as consumers are still laser-focused on value, given the rising cost of living and the continued prioritization of experiences that were on hold during the pandemic.

However, the company has not been immune to changing spending patterns. It was discontinued last year when shoppers quickly stopped buying discretionary products such as clothing and home goods in a shift that has forced management to cut its guidance sharply.

And Wal-Mart sounded the alarm again in February. The company delivered a weak outlook that overshadowed its strong numbers, warning of shoppers’ malaise. Now, Wal-Mart’s outlook is again key to the stock.

Wal-Mart’s results showed that it sees some broader trends affecting the industry. While grocery sales remained strong, driving same-store sales, discretionary categories such as clothing and home goods were lower.

The company’s large grocery business comes with slim margins — gross margin was down in the quarter — and somewhat of a slump in food prices could be a small headwind later this year.

Nevertheless, Wells Fargo analyst Edward Kelly writes, “Walmart’s performance in the first quarter suggests that the company is confident in its momentum and that future guidance may be conservative.” “The list of high-quality names where we can realistically expect any dividend increase this year is small, but Wal-Mart is the one making the cut.”

The company’s e-commerce business grew 26% in the quarter, while its global advertising business increased 30%, demonstrating the company’s continued evolution away from its core retail business toward faster-growing and more profitable segments.

“Wal-Mart is undergoing a remarkable transformation, dramatically evolving beyond its roots as a traditional retailer into a multifaceted home services company,” wrote Third Bridge analyst Nicholas Cooley.

Write to Teresa.riv[email protected] and Angela Palumbo at [email protected]