Walmart, the largest retailer in the United States, raised its annual guidelines on Thursday, a sign it expects shoppers to continue to gravitate to its value-focused stores as they become more selective in their purchases.
The retailer said it expected net sales to grow 3.5 percent for the fiscal year and operating income to rise 4.5 percent.
Revenue in the first quarter was $152.3 billion, surpassing Wall Street’s estimate of $141.7 billion. Both transactions and the average amount customers spent increased in the quarter.
Higher-income households and younger shoppers are shopping more at Walmart, the company said, reflecting a trend its executives have voiced in recent quarters as Americans face higher-than-usual inflation. The retailer said it was also gaining market share in the grocery category.
“We had a strong quarter,” Walmart CEO Doug McMillon said in a statement Thursday.
Speaking to analysts, Mr. McMillon said inflation slowed consumer spending in discretionary categories such as clothing and household items. That, in turn, creates uncertainty for Walmart executives as they plan for the year ahead.
“We all need a drop in those prices,” said Mr. McMillon. “The continued high inflation rates in these categories, which have persisted for so long, are weighing on some of the families we serve.”
This week’s retail earnings reports provided a glimpse into US consumer mindsets and the state of the industry. Target, Home Depot, and TJX, which owns TJ Maxx and Marshalls, all reported first-quarter earnings that showed sales were down compared to years past, when shoppers spent more.
Home Depot lowered its full-year guidance on Tuesday, saying first-quarter sales fell 4.2 percent compared to the year before. Executives said they had expected 2023 to be a “year of moderation” for the home improvement industry, but the company’s performance was below expectations.
Target’s quarterly sales rose a modest 0.5 percent. The retailer maintained its full-year guidance, but “based on declining sales trends” in its most recent quarter, it said it planned for a broad range of sales results in the second quarter.
Total sales at TJ Maxx’s parent company increased by 3 percent. TJ Maxx and Marshall brands, which offer discounted branded goods to shoppers, posted increases, but sales at HomeGoods fell 7 percent. It maintained its guidance for the full year, forecasting sales growth of 2 to 3 percent.
Analysts said the sales declines were a sign that consumers are more selective about what they buy, and that spending patterns returned somewhat to normal after becoming less predictable during the pandemic. Overall, the economy has remained resilient, with strong wage growth and job growth across a wide range of industries.
“We don’t see a collapse in sales,” said Simeon Siegel, general manager at BMO Capital Markets. “We see disappointing revenues. Consumers are still spending on the things they want to spend.”
Retailers face a profit challenge. Walmart said Thursday that its gross profit percentage, or the difference between the cost of the goods and their sales, has fallen to 23.7 percent, slightly lower than Wall Street estimates. The decline was partly because shoppers bought more groceries and products in the health and wellness category and less general merchandise. Groceries typically have lower profit margins for retailers than discretionary categories such as apparel.
Target said Wednesday that its gross margin rose to 26.3 percent from a year earlier when it had a glut of inventory and higher supply chain costs. It said higher prices also helped boost that number. But Target warned that shrink, the industry term for inventory that entered a store or warehouse but left without accountability, would hurt profitability by more than $500 million compared to last year.
Retail analysts had expected operating margins to be smaller this quarter, given more promotions to entice shoppers to spend and customers buying more items like groceries that yield lower profits.
That consumer behavior was reflected this week in April’s retail sales report. Retail sales rose a modest 0.4 percent compared to March, reversing a two-month decline. (The number is not adjusted for inflation and is sometimes revised.)
Department stores, health and personal care stores, and grocery stores all posted increases. Spending at furniture stores, electronics stores and home accessories retailers fell. Spending in restaurants and bars rose by 14.5 percent.
Restaurants and flights are usually considered discretionary, but they are also experiences that Americans spend more on. There is less emphasis on buying big items for the home, as many shoppers spent the early stages of the pandemic doing just that.
“Part of what we’re going through right now is a bit of a consumer budget rebalancing,” said Michelle Meyer, chief economist at Mastercard. “As we look ahead, should we expect this division between experiences and goods to last forever? Of course not. But there is still more catching up to do for some of these experience-based spending categories where consumers are still very keen to meet their continued demand.”
However, some analysts warn that a confluence of factors – including consumer savings, tightening credit and persistently high prices – would cause shoppers to pull back in the second half of the year.
Michael Lasser, a retail analyst at UBS, said the “very clear pattern” with retailers’ earnings results this week showed that consumers were more discerning about what they bought.
“My personal belief is that this will continue for the foreseeable future,” said Mr. Welder. “What will strongly influence the direction of spending from there is what happens to the labor market.”
