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Walmart Cuts Outlook on Inflation Concerns, Signaling a Challenging Period for Retail

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Walmart has adjusted its Q2 and full year 2022 profit outlook, as the retail giant expects shoppers to cut back on extraneous spending in favor of staples like groceries. This potential bellwether for retail as a whole caused share prices to drop at multiple leading companies, including Walmart, Amazon and Target, as investors prepared for a slower second half of the year.

Walmart actually expects comparable store sales to rise to 6% during Q2 2022, up from the previously expected 4% to 5%. However, low-margin food and consumable products are expected to make up a greater share of purchases, which will ultimately push profits down as shoppers stock up their pantries to try to keep ahead of inflation. Profitable categories like apparel may require deeper discounts to stimulate sales, which will further eat into margins.

Walmart expects inflation to continue to have an impact on the second half of the year, with comparable sales growth slowing to 3%. Net sales growth is expected reach 7.5% in Q2 but just 4.5% for fiscal 2022 as a whole. Operating income is expected to decline 13% to 14% in Q2 and 11% to 13% for the full year.

“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” said Doug McMillon, President and CEO of Walmart in a statement. “We’re now anticipating more pressure on general merchandise in the back half; however, we’re encouraged by the start we’re seeing on school supplies in Walmart U.S.”

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In addition to a strong start to the back-to-school season, Walmart expects its grocery market share to rise as shoppers put an even greater emphasis on price.

The price of Walmart shares fell approximately 8% on the news when the market opened on July 26. Target’s share price fell just shy of 4%, while Amazon fell slightly over 4% during the same period. Many other retailers also saw their share prices slump by the low single digits in the wake of Walmart’s predictions, including Nordstrom (-5%), Nike (-2%), Best Buy (-3%) and Gap (-4%).

Target also projected reduced margins in late 2022, down to approximately 2%, as the retailer puts an emphasis on discounting to help it reduce inventory and prepare for future growth.

“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest-relevant with our assortment,” said Brian Cornell, CEO of Target in an interview with CNBC.

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