Hot dogs vs. cold cuts; Rising Costs Shape Choices at Walmart

NEW YORK — As inflation hovered near levels not seen in 40 years, higher-income Americans turned to Walmart to cut costs on groceries, while lower-income customers swapped processed meats for cheaper hot dogs and canned tuna.

That boosted sales for Walmart in the second quarter, the company reported Tuesday, but the downward shift at nearly all points along the social spectrum reduced profit margins.

And the same forces that shape the choices Americans make about where they buy food and what they eat are forcing Walmart to cut prices and clear huge inventories of things customers asked for during the pandemic; TVs, casual wear, sporting goods and a host of other items that are not considered essential.

“We are pleased to see more customers choosing Walmart during this period of inflation,” said CEO Doug McMillon. “The actions we have taken to improve inventory levels in the US, along with a heavier mix of supermarket sales, are putting pressure on profit margins.”

Retailers this year had to stay on top of shopping habits that have changed dramatically with both rising costs and consumers preferring to spend money away from home rather than on it as the pandemic subsides.

The retailer beat Wall Street’s expectations, and sales in stores that had been open for at least a year rose 6.5% as more Americans tried various ways to cut spending through Walmart.

After being taken aback by how quickly its customers turned, Walmart said it is making progress in getting rid of excess inventory, although it remains an issue. The company said Tuesday that the decline in earnings it forecast a month ago will be smaller than feared.

Shares of Walmart rose nearly 6% on Tuesday.

Walmart Inc., based in Bentonville, Arkansas, is one of the first major retailers to report quarterly results and is considered a critical spend barometer given its size and broad customer base.

Walmart shocked Wall Street three weeks ago when it lowered its earnings outlook for the first time since 2015, and shares of a company that prospered during the pandemic plunged 10%.

The warning followed an announcement by Target, another pandemic superstar, the previous month that it was canceling supplier orders as inventory piled up, unaffected by consumers who no longer wanted to furnish their homes as COVID-19 eased its grip.

Sales of casual clothes, TVs, and other electronics that flew off the shelves and into the homes of Americans sheltering in place stalled as people returned to restaurants, shows, or travel.

Evidence of a massive consumer shift registered at Walmart in a number of places. Sales of private supermarket brands, which are generally cheaper, doubled from the first quarter to the second.

Walmart canceled orders worth billions of dollars to equalize its inventory and now believes only about 15% of its total inventory growth in the second quarter is above optimal levels.

The situation stabilized somewhat as the quarter progressed, Walmart said. It saw the influx of new customers and the lower gas prices of recent weeks offered some relief. Strong spending on back to school helped.

Walmart Inc. earned $5.15 billion, or $1.88 per share, or $1.77 excluding one-time costs and charges. That easily beat the $1.62 per share Wall Street was looking for, according to FactSet.

It also surpassed last year’s profit of $4.27 billion.

Revenue rose 8.4% to $152.86 billion, exceeding analyst expectations.

It now expects consolidated adjusted operating income for the year to fall 9% to 11%, an improvement from the company’s previous forecast of 11% to 13%.

The stock rose $7.13 to $139.77 per share in late morning trading.

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