Walmart Inc. stock soared the most in two years as U.S. shoppers flocked to its stores to find discounts amid surging inflation, spurring surprisingly robust third-quarter results and an improved annual profit outlook. 

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Shares closed Tuesday up 6.5 per cent  at US$147.44, the most since July 2020. That erased the prior year-to-date decline. 

The world’s largest retailer also reported progress in reining in bloated inventories and unveiled a new US$20 billion program to buy back its stock. On top of that, Walmart is deepening inroads with wealthier customers as they hunt for bargains, Chief Executive Officer Doug McMillon told Wall Street analysts in a conference call Tuesday. 

The results, labeled a “grand slam” by Citigroup Inc., underscored Walmart’s progress in righting the ship after unwanted apparel and home goods piled up earlier this year and hammered profit by prompting price cuts. While Walmart took a wait-and-see tone in its expectations for the holiday shopping season, its outlook soothed fears of another nasty surprise. 

Walmart’s inventory position “may translate to less risk from post-holiday markdowns,” said Jennifer Bartashus, an analyst at Bloomberg Intelligence. “We believe the company is capturing a greater share of spending from shoppers seeking value.”

Adjusted earnings of US$1.50 a share surpassed the average analyst estimates of US$1.32 for the third quarter, which ended in late October. In a statement, Walmart issued an improved profit forecast for the year, saying adjusted earnings would decline no more than 7 per cent , compared with previous guidance for a drop of as much as 11 per cent .

 
GROCERY GAINS

Cost controls and market-share gains in grocery propelled the better-than-expected results, Chief Financial Officer John David Rainey said on the call. Comparable sales in the U.S. climbed 8.2 per cent , excluding fuel, propelled not just by higher prices but by a 2.1 per cent  increase in transactions — twice the gain in the second quarter. 

Comparable sales in grocery posted a percentage gain in the mid-teens and unit volumes in food rose after a slight decline last quarter. Almost three quarters of Walmart’s market-share gains in grocery came from shoppers with household incomes over US$100,000, extending a trend that the company flagged in the summer.

Walmart is expanding its share of shoppers “in every income bracket,” demonstrating that everyone is looking to lower costs, even if it’s on everyday items, said Neil Saunders, managing director at GlobalData.

U.S. inventory was up about 12 per cent  in the third quarter, primarily due to inflation. That compared with a 26 per cent  increase in the second quarter. The U.S. unit currently has about US$1 billion in excess inventory, down from US$1.5 billion last quarter, John Furner, the head of the company’s U.S. operations, said on the conference call. 

For Walmart as a whole, revenue rose 8.7 per cent  in the third quarter to US$152.8 billion. The Bentonville, Arkansas-based company now expects 5.5 per cent  sales growth for the year, a percentage point more than before. 

 
OPIOID SETTLEMENT

Based on generally accepted accounting principles, Walmart reported a loss of 66 cents a share, dragged down in part by more than US$3 billion in charges related to legal settlements regarding sales of opioids. 

For planning purposes, Walmart expects an inflation rate next year of a little more than 3 per cent , Rainey said. That’s about a percentage point lower than the median analyst estimate compiled by Bloomberg. McMillon said price increases have been particularly stubborn on dry goods in grocery, heralding potentially difficult negotiations with consumer-packaged goods suppliers. 

Broadly speaking, Walmart’s improved profit outlook points to confidence that U.S. shoppers will still have at least some money to spend during the holidays after contending this year with the highest inflation rates in four decades. But its forecast of a 3 per cent  gain in U.S. comparable sales in the fourth quarter, excluding fuel, implies only steady gains, not the blow-out performance of the third quarter. 

 
'MAIN CONCERN'

“The main concern is potential for deceleration into holidays (and beyond),” Greg Melich, an analyst at Evercore ISI, said in a note to clients. 

Walmart’s fourth-quarter forecast may be conservative, Citigroup analyst Paul Lejuez said in a report in which he praised Walmart’s performance. 

McMillon said promotional activity by rivals is within normal ranges so far, implying that he doesn’t see larger-than-usual discounts. But it’s too early to say how the crucial year-end shopping season will end up. 

“The fact that we’re strong in food and consumables is relevant here,” he said. “It’s just early days, we’ll see how the rest of quarter goes.”