To The Moon

Why is profit margin so important to Wal-Mart?

Why situation deteriorate far beyond management expectations?

​$Wal-Mart(WMT)$ hit the biggest one-day decline on May 17, due to the disappointing first quarter earnings of fiscal year 2023 ending April 30, 2022.

Revenue increased by 2.4% year-on-year as expected, slightly exceeded the consensus, but the profit indicators, whether operating income or EBITDA, missed quite much. From the following chart, we can see how Wal-Mart disappointed investors.​

Revenue still strong under inflation

1. The comparable sales contribution of Wal-Mart's e-commerce is-0. 3%, compared with 3.6% in the same period last year. In other words, after pandemic, consumers still prefer Wal-Mart's offline stores
2. The Transactions this quarter was flat from last year, all the growth came from the increase in ticket (3%), that is to say, the increase is brought by inflation, while consumers were more below the regression line, but the desire to buy has not increasedThat may be because Wal-Mart does not have a high percentage of its customers' overall wage growth that outstrips inflation. Besides, the income of Sam's club actually beats, although the profit margin also dropped a lot. The increase of membership users also reflects that users are sensitive to price to a certain extent.​​
3. The international revenue is even less than expected. Wal-Mart's fiscal quarter ends on April 30th, and the impact of the Chinese market determines. More importantly, the appreciation of the US dollar directly reduces income by one pip.

Profit slide has a greater impact

1. On the cost side, due to inflation, the inventory level has risen to a historical high. Although the turnover days of inventory remain good, it is obvious that Wal-Mart can't spread the more expensive raw materials, logistics costs and storage costs to the downstream in time, and the cheap inventory of "first in, first out" in accounting are all used up, it hurts the gross margin.​​
2. Logistics costs are higher, and the management specifically pointed out two points.One is the rising fuel cost which affects the supply chain, and the other is that the container cost of international freight. In the former, since the war in Ukraine, oil prices have been high and continue to affect; The latter is also influenced by important international freight ports such as Shanghai and Shenzhen.
3. Some analysts specially asked in the conference, why was the profit margin still optimistic in the conference last quarter (22Q4), and there was a huge miss in this quarter (23Q1)? The management said it was because the "deterioration in the second half of this quarter" was beyond expectation. In fact, the international events that Wal-Mart executives can't predict are nothing more than the Ukrainian war and the policy of in China.
4. Adcance offline reopening increased Wal-Mart's labor costs. Wal-Mart hired many Associates to deal with it because of its control policy last year, and opening up early made this part of the cost unnecessary (and the money was spent). To make matters worse, becauseInflation continues to be high, and Wal-Mart has to raise wages.

For Wal-Mart, a company with small profits but quick turnover, the control of profit margin needs to be very precise. Once the cost and expense rise, the profit margin will be hurt exponentially, which is why investors pay special attention to Wal-Mart's profit level.

In this financial report, Wal-Mart also updated Q2 performance guidelines (which are usually not updated this quarter), although the revenue growth rate increased from 3% to 4%, However, operating profit has been lowered from 3% to-1%, and EPS has been lowered from 5%-6% to-1%. This means that at least some cost increases cannot be alleviated in one or two quarters.

We can think that the management wants to release the poor expectations at one time. Instead of suffering from it in the next quarter, it is better to take the initiative to confess to investors first. After all, for them, the war in Ukraine is unpredictable, and there are many variables in the supply chain problem that they can't predict at all.

But think optimistically, these two major crises will end sooner or later. However, under the inflation environment in the United States, how to improve operational efficiency and enhance consumer purchase is an urgent problem for more management.

At the same time, we should also pay attention to the situation of other supermarkets and make a comparison.$Target(TGT)$​ $Costco(COST)$​ $Macy's(M)$