(Bloomberg) -- Walmart Inc. fell after a surprise cut to its profit outlook that contrasted sharply with upbeat results early Tuesday from Coca-Cola Co. and McDonald’s Corp. Taken together, the business updates suggest consumers have little left over for discretionary goods as they spend more on food and fuel.
The retailer’s adjusted earnings per share will fall as much as 13% in the current fiscal year as US shoppers spurn big-ticket items and focus on buying less profitable groceries with consumer prices soaring, Walmart said Monday. Two months ago, the company said earnings per share would only dip about 1%. In February, it had predicted a modest increase.
Walmart slid as much as 8.5% on Tuesday -- the most intraday since May 17. The shares had dropped 8.8% this year through Monday’s close. Competitors Target Corp. and Amazon.com Inc. also fell, although their more upscale customers may prove more resilient.
See also: Walmart’s warning will make retailers and the Fed nervous
Walmart’s warning kicked off a week of bellwether earnings reports from consumer-goods giants. But Coca-Cola and McDonald’s posted earnings that largely outperformed expectations as consumers continued spending on fast food and soft drinks in spite of higher prices.
Target cut its profit forecast last month, citing the cost of whittling merchandise stockpiles that its customers were increasingly reluctant to buy as inflation hits a four-decade high. Walmart said it was feeling similar pain as it slashes prices on some goods such as apparel.
“This will potentially send shock waves through the sector,” said GlobalData’s Neil Saunders. “When things go wrong at Walmart, you can extrapolate that it’s happening at other retailers, as well.”
‘More Pressure’
“Walmart is seeing more pressure because they cater to a low-income customer,” said Brian Yarbrough, an analyst at Edward Jones.
The dimmer outlook at Walmart gives US policy makers and investors a late-breaking data point to factor in as they try to determine where the economy and interest rates will be headed over the coming months.
The Federal Reserve is widely expected to increase its key policy rate by three quarters of a percentage point later this week, looking to tamp down stubborn inflation even as signs accumulate that the economy could be tilting into a recession.
A reading on gross domestic product due Thursday could confirm that the economy has contracted for two quarters in a row. That makes the Fed’s task even more delicate as it tries to cool off rising prices without causing a more severe downturn in activity.
“When something impacts a retailer that everyone knows like Walmart, that can lead to a further slide in consumer confidence,” Jennifer Bartashus of Bloomberg Intelligence said in an interview. “That can lead us down a recession road.”
Pandemic Buildup
For retailers, weakening profit forecasts are emerging as the painful consequence of building up inventories after years of supply-chain constraints and booming demand. Now that life is returning to normal -- even if the pandemic hasn’t gone away -- retailers are increasingly stuck with stockpiles of unwanted merchandise amid unpredictable swings of demand.
Consumers, meanwhile, are not only contending with inflation but also shifting more spending to services such as travel and restaurants.
On the plus side, Walmart has been encouraged by US sales of back-to-school goods, Chief Executive Officer Doug McMillon said in the statement. Comparable sales in the US are set to climb 6% in the second quarter, which is higher than expected, and the company has also made progress in clearing out inventories of consumer durables.
But additional markdowns are needed for apparel, he said. In addition, “a heavier mix of food and consumables” is hurting gross margin, a broad measure of profitability, the Bentonville, Arkansas-based company said. Groceries tend to have lower margins than general merchandise.
See also: Inflation-battered Americans get chance to go bargain hunting
Operating income will fall 13% to 14% for the quarter and 11% to 13% for the full year, Walmart said. The retailer reports earnings on Aug. 16.
“The increasing levels of food and fuel inflation are affecting how customers spend,” McMillon said. “We’re now anticipating more pressure on general merchandise” in the second half of the year.
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