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Walmart (WMT) Down More Than 10% in 3 Months: Here's Why

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Several retail companies are grappling with supply-chain headwinds and Walmart Inc. (WMT - Free Report) is not immune to it. Supply-chain bottlenecks, escalated costs and persistently elevated inflation weighed on the company’s first-quarter fiscal 2023 results, wherein management lowered its earnings per share (EPS) guidance for the fiscal. Apart from this, the company’s results were somewhat affected by divestitures in the International segment.

The Zacks Consensus Estimate for the current fiscal-year EPS has gone down from $6.43 to $6.40 over the past 30 days. Shares of this currently Zacks Rank #4 (Sell) company have declined 13.5% in the past three months compared with the industry’s decline of 15.6%. Let’s delve deeper.

What’s Hurting Walmart?

The gross margin at Walmart U.S. fell 38 basis points (bps) in the first quarter of fiscal 2023 due to an adverse product mix, high supply-chain costs and increased markdowns. Most of the decline was due to the supply chain, fuel and e-commerce fulfillment expenses. Overall, WMT’s consolidated gross profit margin contracted by 87 bps, primarily due to Sam’s Club, wherein the gross margin fell 219 bps. This was attributable to supply-chain costs, a fuel mix, inflation and markdowns stemming from the delayed inventory. Management expects the gross margin to remain under pressure in the second quarter, though it is likely to improve sequentially.

Moving on, SG&A costs escalated by 39 bps as a percentage of sales due to higher wage costs at Walmart U.S. The operating income at constant currency or cc fell 22.7% to $5.3 billion. Consolidated operating expenses as a percentage of sales increased by 45 bps year over year, stemming mainly from elevated wage costs at Walmart U.S. Some of the cost headwinds are likely to persist.

Walmart completed the divestiture of its businesses in Argentina, the United Kingdom and Japan during the first quarter of fiscal 2022.  We note that Walmart’s overall revenues in the first quarter of fiscal 2023 were hurt to the tune of about $5 billion by divestitures related to the Walmart International business and $0.4 million due to adverse currency movements. The Walmart International segment’s net sales fell 13% to $23.8 billion. Divestitures hurt the segment’s net sales by $5 billion and currency movements had a $0.4 billion adverse impact. On a cc basis, net sales dropped 11.6% to $24.1 billion. The operating income, on a cc basis, slumped 33.7% to $0.8 billion.

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A Look at Q1 & Ahead

The company posted soft first-quarter fiscal 2023 earnings. Management stated that its U.S. business’ operating income was mainly hurt by higher costs related to staffing, an adverse mix due to the lower percentage of general merchandise and fuel costs and supply-chain woes. The soft earnings results were a product of the unusual economic landscape, with U.S. inflation levels (especially food and fuel) creating greater-than-expected pressure on margins and operating expenses. WMT’s adjusted earnings of $1.30 per share tumbled 23.1% from the year-ago period’s figure of $1.69 and missed the Zacks Consensus Estimate of $1.46.

Management now expects the consolidated operating income to decline around 1% at cc and remain flat, excluding divestitures. The consolidated operating income was previously expected to grow nearly 3% at cc and at a greater rate than net sales, excluding divestitures. Management now envisions the EPS to decline nearly 1% in fiscal 2023 and remain flat year over year, excluding divestitures. Earlier, the EPS was likely to grow in the mid-single-digit range. Excluding divestitures, it was expected to rise 5-6%. For the second quarter of fiscal 2023, the consolidated operating income and the EPS growth are expected in the range of flat to a slight increase.

While Walmart’s robust omnichannel efforts are likely to continue being a driver, the abovementioned costs cannot be ignored in the near term.

Solid Picks You May Look at   

Here are some better-ranked stocks – Kroger Co. (KR - Free Report) , Dillard's, Inc. (DDS - Free Report) and Dollar Tree (DLTR - Free Report) .

Dillard's, which operates retail department stores, sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 224.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Dillard's current financial-year sales suggests growth of 6.1% from the year-ago period. DDS has an expected EPS growth rate of 14.6% for three to five years.

Kroger, a renowned grocery retailer, sports a Zacks Rank #1. Kroger has a trailing four-quarter earnings surprise of 20.3%, on average.

The Zacks Consensus Estimate for KR’s current financial-year sales and EPS suggests growth of 6.7% and 5.7%, respectively, from the year-ago period.

Dollar Tree, a discount variety retail store operator, sports a Zacks Rank #1. The company has an expected EPS growth rate of 15.5% for three to five years.

The Zacks Consensus Estimate for Dollar Tree’s current financial-year sales suggests growth of 6.7% from the year-ago period. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average.

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The Kroger Co. (KR) - free report >>