Sluggish general merchandise sales hurt Walmart’s profit margins in otherwise stellar first-quarter numbers

However, the big-box retailer still posted revenue growth of 7.6% year-over-year, clocking in $152.3 billion in sales. And on the whole, Walmart reported operating income of $6.2 billion, up 17.3% year-over-year. Same-store sales for Walmart U.S. rose 7.4%. The company took a positive outlook while discussing Thursday’s results and raised its guidance for the full year based on its first quarter performance, underscoring how Walmart believes it will benefit amid continued inflation.

On the earnings call, Walmart CEO Doug McMillon said the company had a strong first quarter and added that Walmart’s “omnichannel model” continues to resonate with customers and members. “Sales growth was strong globally, including growth of 26% in e-commerce. Profit grew much faster than sales and we made further progress on inventory levels,” he said.

McMillon said Walmart’s high-margin revenue streams — including its marketplace, advertising business and membership — continue to meaningfully outgrow the base, which, in turn, helped contribute to profit growth. “We’ve increased the seller counts in the U.S. by more than 40% year-over-year, and the number using Walmart fulfillment services has more than doubled. We’re adding higher profile in-demand brands that our customers are searching for. But not typically distributed at Walmart. elevating our profile is a digital shopping destination. And in India, Flipkart’s commerce platform continues to scale.”

“As expected, a higher mix of sales in the food and consumables categories negatively affected gross profit, but strong expense management and progress with our newer mutually reinforcing businesses, helped us grow profit ahead of sales at 17.3%,” he added.

Walmart posted a 26% increase in e-commerce sales globally and a 30% increase in its global advertising business.

Addressing the decline in general merchandise, McMillon said, “in this environment, as customers manage household budgets more tightly and are biasing spending toward everyday essentials, we’re reinforcing our value proposition across the merchandise offering including seasonal events savings featuring high-quality owned brands and leaning into opening price points.”

At a high level, analysts said Thursday’s results signal that Walmart is growing faster than the retail sector as a whole. It has been able to boost its essentials business despite inflation by not raising prices enormously. Analysts cautioned, however, that Walmart’s position in general merchandise does not support growth.

“They have kept a lid on price increases, they’ve been very good at promoting their low prices,” Neil Saunders, managing director for retail at consulting firm GlobalData told Modern Retail. “They have some very good private labels that are very strong in terms of opening prices, and those things are attractive to customers,” added Saunders.

However, Saunders said, the slight issue is that Walmart’s new shoppers, especially in the higher income brackets, are not crossing the aisle to shop for general merchandise. “On that front, there is something to be said about Walmart’s general merchandise offering perhaps not being completely up to scratch.”

Saunders pointed to two potential issues: lack of general merchandise availability and a very average customer offering, especially in apparel. “I think that the general merchandise offered in a lot of stores, especially in stores is a bit spotty. There’s still some sort of shortages, gaps on shelves. I don’t think it’s necessarily deep supply chain disruption, but Walmart does seem to be a little bit on the back foot in terms of general merchandise availability,” he said.

According to Joe Feldman, senior managing director at Telsey Advisory Group, the pressure that Walmart is seeing in general merchandise is consistent with every other retailer in the market right now. “The concern is more about retail consumer spending related to discretionary items. It is somewhat concerning from a retail perspective more broadly — or the consumer more broadly — that spending has been a little slower in the discretionary categories,” said Feldman.

Saunders said Walmart has also benefitted from efforts to improve its online presence.

“They’ve also put a lot of effort into online. They bolstered service levels of online pickup from store delivery, those kinds of services are all very sharp now. They work very well, they’re very efficient, and that’s attracted more people into Walmart as well,” said Saunders.

Within the store, Saunders said, Walmart has put more effort into the assortment and stocking levels for its essentials part of the business. He said the company has also added some aspirational brands to attract the more high-income shopper. “Which has helped to make the whole offer more attractive and it’s good for some of the higher income shoppers that have been coming in as well. added Saunders.

Walmart CFO John David Rainey said food inflation remains over 20% and continues to pressure discretionary wallets. Experts said Walmart is best positioned to win in this environment.

Feldman said inflation should continue to moderate through the balance of the year; “So, we’re assuming that that the strength of sales will continue. The food and consumables categories will probably still be the stronger categories, but that level of strength is going to moderate.”

Walmart expects sales to rise by roughly 3.5% for the rest of fiscal year and increase by 4% in the second quarter.

“I think the guidance that they gave for the full year is very achievable, if not slightly conservative. And we think that in this environment where consumers are under tremendous pressure Walmart is is among the best position retailers out there to continue to win,” said Feldman.