Walmart slashes profit forecast, warning sends stock plunging

Yahoo Finance Live anchors discuss the Walmart stock plunge as the retail giant slashes its profit outlook.

Video Transcript

BRIAN SOZZI: Here are three things you need to know right now. Retailers are shaking in their boots this morning after Walmart slashed its second quarter and full year profit outlooks, which sent the stock plunging. The stock is down nine-- now down about close to 9% here in the pre-market, with the retail giant expecting annual profits to fall by up to 13% compared to the 1% fall it previously predicted.

And, wow, guys, this is a very big-- and I said it on Twitter, and I'll reiterate it here. This a brutal warning from Walmart. And you really get the sense of a company. And it's tough for me to say this-- that it's behind the curve on this economic slowdown. This their second profit warning of this year so far.

And Target-- look, it's a tough space for all them to be in. But Target came out many months ago, took their medicine, reset investor expectations. And now you have Walmart really lagging here in this economic slowdown. They ended that first quarter with inventory up over 30% coming into this quarter. So this is a worrying release to say the very least.

BRAD SMITH: And the warning here, too, comes back to the fact that Walmart being the largest retailer in the US, if it's hitting them, then what business is it not hitting right now? And especially in the retail front, particularly in the core categories. The necessities where they were still having to price and have to pass prices on to consumers, that impacting some of the other discretionary parts of the business here. But particularly, food inflation double digits higher than at the end of Q1, the company is saying. And it's impacting customers ability to spend on general merchandise categories, requiring more markdowns to move through the inventory, and particularly apparel, what Walmart said as part of the release.

And so with that, it largely throws into the conversation, you mentioned, Target. But also on the food side, I mean, Kroger. You've got Albertson's as well. And then, going forward, what we see even more of this from Amazon once they report earnings. Of course, a business that has a lot to do on the e-commerce front.

JULIE HYMAN: But you can argue with the other grocery store chains that they actually have more pricing power than does Walmart on the consumer side. So let's back up for a second. What's happening here is that the company is actually forecasting second quarter comparable sales above estimates, an increase of 6%. The shift, like it was with Target, is what people are spending their money on.

At Walmart, they are spending more of their share on, food on necessities. Less of the share, as you mentioned, on general merchandise, on apparel, on non-necessity, on consumer discretionary items. And that means that Walmart, which is trying to not raise prices too much on the necessities, is getting squeezed in that way, right? It makes higher margin on the non-food stuff. And the non-food stuff is now not moving out the door.

So one comment that caught my eye this morning was from Paula [INAUDIBLE] over at Citi who said, it's going to feel like a recession in apparel. He said he's been writing since May that whether or not the US overall is going into a recession, it's going to feel like a recession in apparel. So this seems to be what we're seeing that there are certain areas that are getting squeezed in particular at Walmart and at all these other places.

BRIAN SOZZI: Yeah, let me be a little instructional here very briefly. We saw signs. And, first of all, it's very important as an investor to always be looking for signs, and piecing things together, and looking for clues. You really got to tell, I would say, over the past few weeks that this quarter or this update was coming from Walmart is not something they do. They normally don't pre-announce, even if it's a good quarter or bad quarter.

But Mattel last week noted price weakness or sales weakness in higher-priced items, like the Barbie Dream House. About $160 item there. That was a red flag. Also a red flag just before that two weeks before, we talked to Levi's. They noted weakness in some jeans lines inside of Target. So you start to see increasing signs of strength-- just stress in the consumer. And now all of this is playing out in Walmart.

And, guys, it's going to take several quarters potentially to work down this inventory. And now you're starting to think about a very promotional unfriendly margin backdrop for Walmart and many other retailers for this holiday shopping season. I think that's where you're seeing a lot of that pre-market pressure on a lot of retail names.

JULIE HYMAN: Yeah, and there's a comment out from Bank of America this morning on Amazon in particular saying that the Walmart news does imply additional gross margin pressure at Amazon because consumers are trading down. Also, bank of America saying their most recent aggregated card data shows that online spending for the lowest income cohort, the lowest income consumers, down 6% in the second quarter. So we're seeing Amazon down 4% this morning. But, really, it's an across the board drop.

BRIAN SOZZI: And we'll have more coverage of this, but quick reminder. The first instinct is that Walmart caters to the low income consumer. That's not the case. This is a broad snapshot of what is happening here in this country. Low income, middle income, higher income. And now you get the sense that all three of these economic cohorts are all seeing weakness right now. And they're all pulling back for various reasons.

BRAD SMITH: Two other companies to keep an eye on with regard to this as well-- Procter and Gamble. Of course, one of the biggest suppliers for Walmart. And then, Additionally, HP. If you're seeing a pullback in the discretionary spending, especially in that consumer tech aisle as well of Walmart, HP could also be impacted by this going forward.