Walmart Sees Demand Shift for Low-Priced Bacon and High-Ticket Game Consoles

Citing unexpected pressure from supply chain costs, rising U.S. wages and what it called unusual inflationary challenges surrounding food and fuel, Walmart said Tuesday (May 17) it is making adjustments after posting its biggest earnings disappointment in at least five years.

Although the retailer’s first-quarter top-line revenue grew 2.4% for the three months ending April 30, the costs involved in making those sales, as well as paying its 2.3 million employees, were unexpectedly high, a combination that not only crimped margins but reduced its bottom-line profit by 23%.

“We’re not happy with the profit performance for the quarter, and we’ve taken action, especially in the latter part of the quarter, on cost negotiations, staffing levels and pricing while also managing our price gaps,“ Walmart CEO Doug McMillan told investors.

Officially, the Arkansas-based operator of 10,500 stores said its Q1 sales of $142 billion were led by a 3% gain in U.S. same-store sales, where the retailer said it was able to gain share in its lucrative grocery business — its single largest category — where it leads Amazon by more than a 10x margin.

Read more: US Consumers Spend 10x More on Groceries at Walmart Than Amazon

Customer Habits

“I think it’s important to recognize that there’s more than one consumer. We serve the whole country, [and] we’ve got a breadth of customers, and they behave differently,” McMillion said, adding that the company is seeing some indications of changed buying behavior, including switching to lower-cost private labels from national brands.

Continuing that theme, Walmart U.S. CEO John Furner pointed out that the company is also seeing pockets of strength in select high-ticket items, such as gaming consoles, patio furniture, grills and other hardlines due to recent warm weather.

“We do see some consumer switching,” he said. “We see categories like deli, lunch meat, bacon, dairy, where customers are trading from [national] brands to private brands, so we see both of those things happening at the same time, and we’re seeing a wide range of consumer behavior.”

Importance of One-Stop Shopping

All year long, shares of Walmart have benefited from the belief that financially stretched consumers would shift their shopping toward more value-oriented players. It’s a trend that not only kept Walmart’s stock positive while the shares of most of its peers were falling, but it also saw its Sam’s Club warehouse unit grow its comp sales by 10%, led by a 10% increase in new members and membership income.

At the same time, the company said that inflation had increased the average overall basket size, but units per basket were down a bit. It’s a trend that reflects the importance of pricing at a time when consumers are continuing to shift back to in-store shopping.

“Price leadership is especially important right now as one-stop-shopping becomes more than just a convenience issue when people are paying over $4 a gallon for fuel,” McMillon said, noting that Walmart itself spent $160 million more on fuel for its own trucks during the quarter.

At the same time, despite Walmart’s efforts to diversify from its core base of physical stores, the current shift back to stores cut into its digital business growth, which rose just 1% versus a year ago, albeit 38% over the past two years.

Going out With a Bang

Appearing on his final earnings call, outgoing Chief Financial Officer Brett Biggs, who is being replaced by PayPal’s John Rainey next month, said several of the company’s new higher-margin initiatives continued to outpace the performance of the full company, including a 30% increase in the Walmart Connect advertising business, which he said continues to scale. This, as its new data monetization business — Walmart Luminate — saw 75% quarter-on-quarter growth as more supplier-partners collaborated with merchandisers to use new customer insights and its platform.

See more: PayPal’s John Rainey to Replace Brett Biggs as Walmart CFO

While conceding that he would have liked to have gone out with a solid quarter, the outgoing CFO and 22-year Walmart veteran also expressed confidence that the retailer is well positioned to navigate what he called a very fluid environment.

“I’m proud of the way the company has performed. Our Q1 sales are strong across all segments, and that strength has continued into the start of Q2,” Biggs said, calling the trailing three-month period one of the most challenging yet.

“We just have to deal with [the challenges], but we like the hand that we’ve got to play,” Biggs added. “When things are more difficult, we should outperform, so while our first-quarter performance is a disappointment to us, we’re going to refine this and still have a strong year.”