Walmart (WMT) shares rose in the first quarter of trading Tuesday, with investors focusing on whether rising gas prices will boost consumer confidence.
Walmart warned late last month that "increasing levels of food and fuel inflation are affecting how customers spend," adding that although inflation is likely to support the dollar value of sales between now and the end of the year, shoppers are less likely to spend on discretionary items such as clothing and shoes.
Walmart forecasts a 7.5% increase in second quarter sales, but a 8% to 9% decrease in adjusted earnings as margins shrink and the retailer moves to reduce its excessive first half stockpiles with deeper price reductions.
Analysts anticipate a adjusted bottom line of $1.62 per share, compared to $150.8 billion last year. Same store sales in the United States are expected to increase by 4%.
"The primary focus for the results release is the inventory situation as of the end of the second quarter," said Daiwa Capital Markets analyst Kahori Tamada, who has a 'overweight' rating and a $130 price target on Walmart's stock.
"We are interested in whether the company had already ordered goods for the holiday shopping season before sales started to decrease, and if so, whether it is able to cancel those orders," she said. "In addition, excessive inventory is a major issue for the retail industry as a whole. Managing macroeconomic conditions is difficult, making it probable that earnings visibility will remain blurred throughout the future."
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Walmart said it expects operating margins to decrease further, to between 3.8 and 3.9% in the second half of the year, with adjusted earnings falling between 11% and 13% from forecasted levels. Net sales will however, be slowing to a speed of 4.9 percent for the whole year due to a $1.8 headwind related to the strength of the US dollar.
A stronger dollar reduces overseas sales and makes profits less costly to repatriate. The U.S. dollar index, which tracks the greenback against a basket of six major global currencies, has risen more than 12% so far this year and reached a fresh two-decade high earlier this month.
Walmart may find that the recent drop in gas prices in the United States, which was put at $3.965 on Sunday, the lowest level since early March, may be a contributing factor to what is already described as a robust start to school sales in the United States.
As a result of the drop in gas prices, Americans are spending $400 million less every week, and a good portion of those savings is likely to return to Walmart revenue in the October quarter and beyond.
Consumer confidence is also on the upswing, with research from the University of Michigan showing expectations at a five-month high even as the survey's closely-tracked analysis of current conditions remained weak.
Both the job market and the economy are showing signs of retaining their strong gains for 2022, with new recruits reaching 528,000 last month, bringing the headline unemployment rate to 3.2 percent. Wages, although not keeping pace with the 8.5% inflation rate recorded earlier this month, are still up 5.2 percent from last year, according to the Bureau of Labor Statistics.
Walmart's stock was rated 0.6 percent higher in early Monday trading to change hands at $133.13 each, a move that would leave the firm with a six-month decline of around 0.9 percent and a valuation of the business at $365 billion.