Due to rising prices, consumers seek only essentials... Walmart lowers its performance forecast for this year

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The major U.S. retailer Walmart has lowered its earnings guidance for this year due to high inflation. While sales of essentials such as food have increased, sales of clothing and electronics have declined, leading to a forecast of deteriorating profitability for Walmart.

According to CNBC and other outlets on the 25th (local time), Walmart projected that its adjusted operating earnings per share for the second quarter and full year will decrease by 8-9% and 11-13%, respectively, compared to the same period last year. Previously, Walmart expected second-quarter operating earnings to remain similar to last year and anticipated a 1% decline on an annual basis compared to the previous year.

The reason Walmart downgraded its earnings outlook is due to the worst inflation in the U.S. in over 40 years. Walmart analyzed that prices of essentials such as energy, including gas, and food have risen sharply, causing consumers to prioritize these items and reduce other spending. In fact, Walmart expects same-store sales excluding fuel in the U.S. to increase by 6% in the second quarter, surpassing the initially expected 4-5%, driven by increased food sales.

Doug McMillon, Walmart’s CEO, said, "Inflation levels in food and fuel are impacting consumer behavior. We expect greater pressure on general merchandise in the second half of this year." He added that while progress is being made to reduce inventory, additional price cuts are necessary to boost clothing sales in U.S. stores.

Generally, retailers earn higher profits when clothing and electronics sell better than essentials. The more sales shift toward essentials, the more Walmart’s earnings outlook is likely to worsen. Following the guidance announcement after market close, Walmart’s stock price fell nearly 10% in after-hours trading. Walmart is scheduled to officially announce its second-quarter earnings on the 16th of next month.

Besides Walmart, other U.S. retailers are also unable to avoid earnings deterioration due to inflation. Earlier, Target, a competitor U.S. retailer, also lowered its second-quarter earnings forecast. It stated that margins are inevitably being hit due to price reductions and order cancellations.