Source: PaxForex Premium Analytics Portal, Fundamental Insight
Shares of Walmart dropped more than $13 a share, or about 10%, in over-the-counter trading Monday after the big retailer released a disappointing report for Q2 and full fiscal year 2023. The news shocked investors, as Walmart doesn't plan to report earnings for that quarter of fiscal 2023 until mid-August. Similarly, Target issued an intra-quarter forecast cut in early June, which caused its stock to plummet.
Walmart and Target are not known to publish such meaningful results for the market in between earnings reports, which adds a level of uncertainty to the broader stock market. However, there is reason to believe that Walmart's performance decline was not a surprise at all. And in many ways, it was easy to anticipate. Here's how Walmart's lowered outlook should be perceived and why these stocks are now buyable.
Walmart now expects sales in the fiscal year 2023 to be 4.5% higher than the previous year, which sounds good until you factor in rising costs due to inflation. This effect is evident in the operating profit forecast, which in the fiscal year 2023 will be down 11% to 13% from the previous year. Similarly, adjusted earnings per share are expected to decline by 11%-13%.
If Walmart's projections are in line with expectations, it will result in an unfavorable schedule. A 12% decline in operating income would put Walmart's operating income in the fiscal year 2023 at $22.8 billion, almost as low as the $22.6 billion it earned in the fiscal year 2021, which was hit hard by the pandemic. Walmart's operating income will be 18% lower than the $27.7 billion it earned 10 years ago.
Walmart expects its full-year operating margin to be between 3.8% and 3.9%, below the 10-year median of 4.6%. Simply put, revenue growth is not enough to combat rising costs.
Walmart is signaling continued pressure on margins as manufacturing costs (such as labor, fuel, shipping and logistics, and product costs) continue to depress margins. In addition, there is a shift in product mix from choice items to basic consumer goods such as food and other necessities.
Walmart promises to offer its customers the lowest prices possible. Low prices mean low margins. However, Walmart generally has higher margins on clothing than on food, and then even higher margins on electronics, furniture, and other more expensive items. These items sold like hotcakes when consumer spending was high in the calendar years 2020 and 2021.
This year, however, is different. Walmart has found that it has too much inventory of items that just aren't in as much demand as they were a few quarters ago. In addition, Walmart is facing a change in season from summer to fall and has had to discount summer merchandise to make room for the fall season.
The problem for Walmart is that it has to forecast customer demand months in advance. Supply chain disruptions and increased demand during the pandemic have forced Walmart and other retailers to order in advance and stock heavily. That's not a problem when consumer spending goes up. But when they are declining, it forces Walmart to pull back to reduce current inventories and make sure it doesn't over-order in case this holiday season turns out to be weaker than originally expected.
Walmart's announcement isn't particularly surprising, given management's comments during the company's fiscal 2023 Q1 earnings report. Rather, the news further underscores the stark reality that Walmart's business may be stagnant for some time before it returns to growth.
As such, it makes sense that Walmart stock would sell off toward a 52-week low. However, investors looking for dividend blue-chip stocks to add to a diversified portfolio should take note of Walmart's 1.8% dividend yield and its market-leading position.
As long as the price is above the 125.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 132.10
- Take Profit 1: 137.00
- Take Profit 2: 146.00
Alternative scenario:
If the level of 125.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 125.00
- Take Profit 1: 121.00
- Take Profit 2: 117.00
