Walmart, the largest retailer in the United States, has raised its sales and profit forecast for the year, even as consumers become more cautious with their spending as the holiday season approaches. However, the company’s shares fell by 7.7% following the announcement. Executives cited higher interest rates and dwindling household savings as reasons for the “somewhat uneven” sales over the past two months.

One of the key factors that has helped Walmart navigate the slowdown in discretionary spending is its focus on groceries. Over half of the company’s merchandise consists of food and other essential daily items. Walmart’s Chief Financial Officer, John David Rainey, observed that while shoppers slowed their purchases in the latter half of October, there was a rebound in early November in categories such as apparel and home goods that have been less popular throughout the year. Rainey mentioned that this cautious spending behavior has prompted the company to be more conservative in assessing the consumer climate compared to 90 days prior.

Rainey added that although shopper visits increased by 3.5% in the third quarter, consumers remain selective and discerning in their purchases. They are also waiting for promotional events like Black Friday and Cyber Monday. This sentiment aligns with comments made by Target CEO Brian Cornell, who also emphasized that consumers are approaching their spending choices with caution.

The slowdown in consumer spending is significant as it accounts for approximately 70% of the U.S. economy. In October, core U.S. retail sales only rose by 0.2% due to higher borrowing costs and the lingering effects of inflation. However, wholesale food inflation has started to decline, indicating potential relief for consumers in the coming months. The U.S. Federal Reserve’s actions, increasing short-term lending rates by over 5 percentage points since March 2022, have contributed to higher consumer lending and mortgage rates.

This year’s holiday season is expected to be less robust than in previous years, according to several retailers, including Walmart. Other retailers, such as Children’s Place and Bath & Body Works, also reported mixed results for the quarter. However, Macy’s had strong results. Analysts, like Michael Baker from D.A. Davidson, believe that given this volatility, it is wise for Walmart to approach the holiday season with caution. Despite missing the midpoint of Wall Street estimates, the company’s updated forecast sets it up for another successful quarter.

Walmart’s ability to keep prices low despite inflation has attracted not only low-income shoppers but also higher-income consumers seeking affordable options. While prices for food and consumables have remained stable compared to the previous year, general merchandise items like apparel and home goods have seen price decreases ranging from three to six percent. The declining prices in general merchandise will allow Walmart to offer even more competitive prices during the holiday season.

Following the release of its third-quarter results, Walmart’s shares reached an all-time high of $169.91. However, the shares experienced a decline after the cautious consumer outlook was conveyed. Nevertheless, Walmart’s shares have still had a positive performance this year, rising by almost 20%, and are relatively more expensive compared to its peers.

Walmart now anticipates earnings per share for fiscal 2024 to be between $6.40 and $6.48, a slight increase from its previous forecast. The company also expects comparable sales for the year to rise by 5% to 5.5%, compared to the previous estimate of 4% to 4.5%. In the third quarter, Walmart’s comparable sales, excluding fuel, rose by 4.9%, surpassing estimates of 3.35%. Online sales also experienced significant growth, rising by 15%. The company reported an adjusted profit of $1.53 per share, slightly higher than the analysts’ average estimate of $1.52 per share.

Useful links:
1. CNBC: Walmart Q3 2022 earnings
2. Reuters: Walmart raises outlook, thanks to higher prices and online sales growth