1 Big Concern Walmart Investors Have About Next Week

Will growth hold up even as e-commerce spending declines?

Walmart Inc. is an American multinational retail corporation that operates a chain of hypermarkets (also called supercenters), discount department stores, and grocery stores from the United States, headquartered in Bentonville, Arkansas. The company was founded by Sam Walton in nearby Rogers, Arkansas in 1962 and incorporated under Delaware General Corporation Law on October 31, 1969. It also owns and operates Sam's Club retail warehouses.

As of January 31, 2022, Walmart has 10,593 stores and clubs in 24 countries, operating under 46 different names. The company operates under the name Walmart in the United States and Canada, as Walmart de México y Centroamérica in Mexico and Central America, and as Flipkart Wholesale in India. It has wholly owned operations in Chile, Canada, and South Africa. Since August 2018, Walmart holds only a minority stake in Walmart Brasil, which was renamed Grupo Big in August 2019, with 20 percent of the company's shares, and private equity firm Advent International holding 80 percent ownership of the company.

Walmart is the world's largest company by revenue, with US$548.743 billion, according to the Fortune Global 500 list in 2020. It is also the largest private employer in the world with 2.2 million employees. It is a publicly traded family-owned business, as the company is controlled by the Walton family. Sam Walton's heirs own over 50 percent of Walmart through both their holding company Walton Enterprises and their individual holdings. Walmart was the largest United States grocery retailer in 2019, and 65 percent of Walmart's US$510.329 billion sales came from U.S. operations.

Walmart was listed on the New York Stock Exchange in 1972. By 1988, it was the most profitable retailer in the U.S., and it had become the largest in terms of revenue by October 1989. The company was originally geographically limited to the South and lower Midwest, but it had stores from coast to coast by the early 1990s. Sam's Club opened in New Jersey in November 1989, and the first California outlet opened in Lancaster, in July 1990. A Walmart in York, Pennsylvania, opened in October 1990, the first main store in the Northeast.

Walmart (WMT 0.39%) stock has become more attractive lately as investors move toward large, stable businesses that can perform well through a wide range of selling environments. The retailer's shares are up so far this year, compared to a slump of over 30% in major competitor Amazon's share price.

That optimism will be tested when Walmart announces its fiscal 2022 first-quarter results in just a few days. That report, set for Tuesday, May 17, will tell investors a lot about the health of consumer spending trends during the latest inflation spike. The big question is whether Walmart is still growing in this rapidly changing selling environment.

Let's take a closer look.

Sales trends will get close scrutiny

Walmart's most recent earnings report contained plenty of good news about the business. Comparable-store sales were up 6% through late 2021, with gains coming from both rising customer traffic and higher average spending.

The chain won market share in the period, partly because it secured enough merchandise, at low prices, to give it an advantage over its smaller peers. Average spending was especially strong, rising 2% on top of a 22% spike a year ago.

Yet Walmart's e-commerce segment was a drag on overall results. That niche likely will be a bigger pressure in Q1, too, considering that shoppers appear to be moving away from digital spending after two years of intense focus in that area. Amazon recently announced some of its slowest growth yet in the online business, which surprised Wall Street. The main concern is that Walmart will report similar weaknesses in the e-commerce division.

Pressure is being seen on multiple fronts

There are pressures beyond just the sales slowdown, too. Walmart likely faced soaring costs in areas like transportation and wages. It has been hard to keep employee turnover low, too, in this tight labor market. And the chain might be seeing a demand shift away from some high-margin products, like home furnishings and apparel, as consumers prioritize spending on essentials.

Investors have been hoping that Walmart's profit margin will start moving back toward the highs they saw back in 2013. But that rebound might take more time, and earnings could be pressured in 2022 by the combination of slowing demand growth and rising investment spending on the business.

Looking ahead

Walmart executives could update their fiscal year outlook to reflect the latest demand and cost trends. Heading into the report, that forecast calls for sales to rise by about 3% after currency exchange swings are accounted for. Profit margins were forecast to hold steady as capital spending jumps.

A weaker selling environment might convince CEO Doug McMillon and his team to lower the earnings outlook on Tuesday. But the chain isn't likely to pull back on needed investments in its stores and the online business. Spending there lays the groundwork for faster sales growth over time.