Walmart: The Profit Warning That Shook Retail

In 1968, Formula One world champion Jim Clark was tragically killed in an accident at Hockenheim in Germany. The motor racing world was shocked by this because Clark was revered as the very best of his generation and ‘if it could happen to him, it could happen to any of us’, was the feeling amongst the drivers mourning his passing.

I was reminded of this when I heard the news last week that Walmart had issued a profit warning. It’s shares dropping by over 8% whilst those of Amazon and Target dropped by more than 4%. If it could happen to Walmart, it could happen to anyone.

“It’s a tell-tale sign that the average consumer is hurting,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “When you have America’s largest retailer guide down like this, you have to take it very seriously.”

The world’s largest economy is now technically in a recession and the rapid slowdown in consumer discretionary spending is hurting retail like never before.

According to Reuters, Walmart, the largest private U.S. employer, said its annual profit could fall by as much as 13%, adding that it would cut prices of clothing and general merchandise more aggressively to attract shoppers.

And Home Depot co-founder, Ken Langone cast a downbeat message over the weekend when he said, “We can agree to one thing. The economy is receding. It’s going down. Now, you want to call it a recession or not — play with the words.

‘But the fact of the matter is, the economy is going down. Every place I’m looking, I’m seeing signs of pullback. … This is serious stuff. And we are in a recession.”

Meanwhile, JPMorgan analysts said that the Walmart announcement “represents another data point of increasing consumer softness over the past two months … as consumers buckle under persistent inflationary headwinds and drain reserves built up during COVID.”

Smaller basket sizes, more frequent shopping trips, trading down to own label — the old adage that “I’m not affected by fuel price rises because I only ever put $20 in the tank”, seems more apt than ever. Consumers are spending less, of that, there is no doubt, however, the real question is, ‘how long will this downturn last?’

The answer to that is that nobody really knows. The war in Ukraine shows no sign of ending anytime soon, the global supply chain crisis likewise, as China applies a zero tolerance approach to the latest Covid-19 ‘outbreak’, locking down over a million people on the back of just four cases.

In the meantime, retailers are left to try to weather the storm. And that means that we should get used to profit warnings, which have always been interpreted as a sign of poor business performance. The truth now however is that they are an indication of the exceptional market conditions retailers are trading in.

Which all means that we should buckle up — there’s plenty more to come. Because if it can happen to Walmart, it can happen to anyone.