Walmart Inc. cut its profit outlook again in a surprise warning weeks ahead of its earnings report, sending retailer shares tumbling and raising new questions about US consumers’ ability to sustain their voracious spending habits with inflation at a four-decade high. 

Adjusted earnings per share will fall as much 13 per cent in the current fiscal year as US shoppers spurn big-ticket items and focus on buying less-profitable groceries amid soaring inflation, Walmart said in a statement Monday. Two months ago, the world’s largest retailer had said earnings per share would only dip about 1 per cent. In February, the company had predicted a modest increase. 

Walmart’s warning kicks off a week of bellwether earnings reports from consumer-goods giants including Coca-Cola Co., McDonald’s Corp. and Procter & Gamble Co. Another big US retailer, Target Corp., cut its profit forecast last month, citing a need to take costly actions to get rid of stockpiles of merchandise that its customers were increasingly reluctant to buy. 

“When things go wrong at Walmart, you can extrapolate that it’s happening at other retailers, as well,” said GlobalData’s Neil Saunders. “This will potentially send shock waves through the sector.”

Walmart slid as much as 10 per cent in late trading to US$118.77. The shares had dropped 8.8 per cent this year through today’s close. Target, Amazon.com Inc. and Costco Wholesale Corp. also declined in late trading.

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.

“When something impacts a retailer that everyone knows like Walmart, that can lead to a further slide in consumer confidence. That can lead us down a recession road,” Jennifer Bartashus of Bloomberg Intelligence said in an interview. 

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.

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 per cent 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. Groceries tend to have lower margins for big retailers than general merchandise. 

Operating income will fall 13 per cent to 14 per cent for the quarter and 11 per cent to 13 per cent for the full year, Walmart said. The Bentonville, Arkansas-based company reports earnings on Aug. 16. 

What Bloomberg Intelligence Says:

“This looks it could be an omen of weak discretionary spending during the critical back-to-school and holiday seasons, which bodes poorly for retailer margins.”

--Jennifer Bartashus, BI senior consumer staples industry analyst

“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.

Edward Jones analyst Brian Yarbrough said Walmart’s guidance cut doesn’t necessarily spell doom for the rest of the retail sector. 

“Walmart is seeing more pressure because they cater to a low-income customer,” he said.