To The Moon

Retailor Earning season has come. On May 18th, $Wal-Mart(WMT)$ the leader of the industry, announced its Q1 financial report. A both revenue and profit beat and guidance upward revision should be good news, should have deserved a big surge. However, despite setting a new high since August last year with an increase of 1.51%, Nasdaq (.IXIC) only rose by a meager 1.3% yesterday. Although this achievement is still outstanding in the retail sector because competitor $Target(TGT)$ earmign is worse.

WMT vs SPX (YTD)

Investors' overall sentiment towards the retail sector is not good; overall, Walmart's Q1 earning far exceeded expectations.

• Revenue was $152.3 billion, up 7.7% YoY and higher than market expectations of $148.7 billion;

• Adjusted earnings per share were $1.47, up 13% YoY and higher than expected at $1.31;

• Comparable sales at Walmart stores increased by 7.4% YoY which was higher than expected at 5.23%; comparable sales at Sam’s Club premium membership stores increased by 7%, also exceeding expectations at 6%.

At the same time in terms of guidance, the company expects Q2 revenue to grow by about 4%, which is consistent with market expectations but comprehensive operating profit will decrease by about 2%. Adjusted EPS will be between $1 .63- $1 .68 , lower than market expectation s of$1 .70 .

Interestingly enough，the company boldly raised its forecast for fiscal year2024，expecting full-year revenue growth rate to reach3 .5 % ，higherthan previous estimatesof2 .5%-3%. Atthesametime,theadjustedEPSisexpectedtobe$6.10-$6.20, higher than the previous expectation of $5.90-$6.05 and also higher than market expectations of $6.14.

Raising expectations, betting on no decline, why is the market still lacking confidence?

The actions of consumers cutting back on spending have lowered performance expectations for the remaining quarters of fiscal year 23. Q1 performed better than expected with a slight decrease in gross profit margin by 0.1%. The company explained that this was due to consumers shifting their spending from non-essential goods with higher profit margins towards essential items such as groceries and health products. This trend was also reflected in Target's financial report where strong inflation led to increased sales of food, beverages, household essentials and cosmetics but overall sales remained weak.

It is too early to raise expectations for 2024, and investors prefer not to believe it will happen without a decline in performance. Consumers' actions of cutting back on spending have lowered performance expectations for the remaining quarters; Q1's performance was better than expected but gross margin slipped slightly by 0.1%. The company explained that this was because consumers were shifting more towards essential goods such as food, groceries, and health products from non-essential general merchandise with higher profit margins which was also reflected in Target's financial report where sales trends remained weak despite strong sales in food, beverages, household essentials and cosmetics due to strong inflation.

The current CPI is mainly supported by high-sticky housing costs which occupy a lot of people's expenses; at the same time, excess savings accumulated during the epidemic are being consumed step by step; according to current rates of consumption depletion speed，it is estimated that they will be depleted by this Q4 ，which means there is no longer any basis for supporting retail growth . If the Fed does not cut interest rates in a timely manner，current interest rates will continue to burden households with high loans；in this situation，Walmart directly raising its forecast for 2024 seems overly optimistic.

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However, compared with peers,Walmart’s biggest advantage lies in its powerful price positioning own brand and full-channel support which may still make grocery stores one of the strongest businesses over several quarters ahead。