Jharonne Martis, Director of Consumer Research at Refinitiv, discusses the inflationary headwinds Walmart could face in Q2 and provides insight on the state of consumer spending.

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Walmart Reports Mixed Q1 Results as Supply Chain, Inventories Eat Into Profits

here to discuss is jaron Martis, director of consumer research at Refinitiv. What are some of the biggest takeaways from the walmart results? Yes, it's good to be here. Good morning. Um, walmart numbers are very interesting because on one end we saw that the, that management had an execution myths when it comes to overstaffing and that ate up on profits. But on the other hand, there are some promising signs and that's mainly because of SaM's club analysts polled by Refinitiv had been very bullish on companies like Sam's club Costco and BJ's because those companies actually sell fuel and the consumer is currently looking for any way to save money, especially at the pump. Having said that SAM's club, same store sales grew 17% today including fuel, but if you exclude fuel, that is still in the double digit comps at 10%. So this is telling us that the consumer is not only going to SAM's in order to fill fill up on gasoline, but they're also buying general merchandise. And this is helping the company company because we're seeing that those transactions are, are actually converting into revenue walmart also told us today on the earnings call that they saw a record number of members in the, in the first quarter. So this is very promising, especially as analysts polled by Refinitiv are bullish on these companies. Clearly, these companies, you know, SAM's obviously obviously being a part of walmart, um, you know, have the strategy of getting foot traffic with those lower ticket items or offering sales on things like, you know, gas or energy even on groceries to the tune where, you know, you have that foot traffic you by the higher ticket items and that certainly does help, but not to the tune where, you know, profit on the bottom line was able to kind of be buoyed up in the same way or by the same proportion that that top line was buoyed up. Is there any concern there on that bottom line figure? Albeit, it does account for other factors outside of uh you know, the revenue generated from other higher ticket items, things like wages, um and even, you know, energy when it comes to transporting some of those goods to its locations. So indeed, management will have to um improve their, their execution going into the second quarter in order to improve the profits in general, When we look at the overall retail space, retailers are warning us not to expect too much from them for the second quarter, the guidance is coming in and a lot of negative guidance is coming in. But what's also interesting is that about 99% of the companies continue to mention that they are concerned about supply chain issues. And about 95% of the companies are telling us that they are concerned about inflation. Still having said this, when we look at the entire picture and we look at april retail sales that came out today, we look at the home Depot numbers and even the walmart numbers, we still see that the consumer is pretty much engaged and this is um a good sign given all the macro economic headwinds that we're hearing right now. It's just that the low end consumers being squeezed more, they are no longer receiving their government stimulus checks like they did last year, retailers are facing the most difficult comparison on record. So, so when you combine these two factors, you see that the retailers are still putting out good numbers given the fact that they're facing difficult comparison, the consumers still engaged only that the low end consumer is being squeezed more than the middle class consumer And amid this inflationary period, that is what we expect those lower and consumers really getting the brunt of the pain around inflation. Let's talk about guidance because you noted that a moment ago, 2023 fiscal year Walmart's expecting what 4% increase in sales, that's just slightly up from the previous guidance, about 3% in growth. Again, that bottom line kind of guidance, not really the best, there is a bit of a pullback, but overall, can you just talk about how walmart is positioned to perform as inflation? Unfortunately, look at the C. P. I. P. P. I read just continues. It just, it just comes down to a matter of them really executing better into the second quarter because walmart still is, there was one company that is giving amazon a lot of competition because of its location, its proximity to the consumer. It's not only catering to the low end consumer, but it has SAm's club which is gaining significantly even more members than it did um during the pandemic. And that consumer is still very much engaged. So it's, it's pretty much comes down to walmart really executing better into the upcoming quarters so that the bottom line won't be as hurt as much Now in general, in the retail space. As we mentioned, the retailers are warning us not to expect too much from them because of supply issues and inflation. So this means that profits in general are expected to be hit. In addition to walmart, we did see that Home depot today did raise the revenue guidance. So we're seeing that the consumer is still engaged and they are spending and sales are coming up revenues. The top line is growing for the most part for retailers, but it's the profits and those are being eaten because of higher supply chain is just trying to get the merchandise on time despite all the supply and and shipment issues that, that the retailers are facing right now. So those are eating the bottom line and the Byetta um, forecast according to refinitiv is expected to be weaker going into the second quarter. So it really does come down to an execution on the retail um, retailer itself, let's talk about Home Depot. That was a bit of a contrast in that this was a report that was pretty solid all the way around. I mean top and bottom line better than expected even on guidance that they upward or they improved guidance moving forward. The Home Depot of retailer really is one of those that is outperforming right now, it kind of almost to what you pointed out a moment ago, there is a divergence amongst the consumer. Those who are higher income who tend to be homeowners maybe kind of boating, albeit complaining about inflation but not feeling the pain as much and that's seemingly kind of trickling in through Home Depot's report. So in addition to that, yes, we are also seeing that the stay at home pandemic theme continues as well, right? Because we see that consumers are still investing in the stay at home experience. And on top of that, when we break down the april retail sales numbers, the government told us that retailers are still gravitating online, so they're still going online to finalize this purchase. So we're still seeing that the pandemic team is still on consumers minds. Um Now the fact that the consumers are still renovating their houses and are spending spending their discretionary income on that. It does show us that the consumer is still firing at all cylinders and the one macro economic indicator that is very um positive too to consumer spending is really the employment number, which is firing at all cylinders right now in the United States. If the consumers feel that their job security um, in the future will still remain, they're going to continue to spend freely, but if they feel that they might lose their jobs, that's when we're gonna see them put their hands in their pockets and hold back on spending. So as of right now, for for for for the interim, as long as the employment market continues to show positive numbers, the consumer will continue to spend freely. We've only got about 30 seconds here, but I want to get your take really quickly. Costco and target those are gonna be reporting earnings in the coming days, what should investors expect there? So the discounters in general are expected to do well, but analysts polled by Refinitiv are more bullish on those discounters that sell fuel because consumers are feeling the pinch about the inflation and they are trading down and they're looking any way possible to save money wherever they can, especially at the field at the gas pump. So they're going to gravitate more towards the membership clubs and that's where analysts are revising their earnings estimates upwards. Alright, really appreciate your time when you're inside jerome Martis, director of Consumer research at Refinitiv