Insights

Down 18%, Can Walmart Turn Things Around in the Second Half Of 2022?

Walmart (NYSE: WMT) stock suffered its largest single-day decline in over 35 years after reporting first-quarter fiscal 2023 results in May. After rebounding from its 52-week low, Walmart stock tumbled a painful 8% last Tuesday after the company released an update to its second-quarter and fiscal 2023 guidance.

While the stock has bounced back a bit since then, concerns about its outlook remain. Despite higher revenue, Walmart has too much inventory as seasons shift and consumer spending declines on discretionary goods. What’s more, higher input costs due to inflation are taking a toll on Walmart’s operating margin. Walmart is now guiding for double-digit declines in fiscal 2023 adjusted earnings per share (EPS) and operating income compared to fiscal 2022.

Let’s determine if Walmart can turn its business around in the second half of 2022 or if there could be more pain ahead.

Image source: Getty Images.

A challenging road ahead

As bad as Walmart’s guidance cut is, it’s important to remember that the big-box retailer is far better positioned than the retail industry as a whole. Walmart’s high-volume, low-cost pricing model tends to do fairly OK during economic downturns and could even stand to benefit as consumers shift buying behavior toward value-priced products.

However, what makes this economic downturn particularly painful is that supply chain disruptions left Walmart with too much inventory. Walmart was prepared for another year of economic growth, not a slowdown that would retrace its business back toward fiscal 2021 levels. And that leaves it more vulnerable to the downturn we are seeing in consumer spending.

Given this position, it would make sense that the worst may not be over for Walmart, especially if inflation lasts for longer than expected, Walmart fails to make progress on inventory reductions, and it orders too much for the holiday season.

Managing expectations

A classic mistake investors will make during times of high volatility, and especially during bear market earnings seasons, is banking on a good quarter to turn a company in the right direction. Walmart’s announcement supports the notion that we are still in a period of high inflation and weak economic indicators. The retailer’s track record and market position indicate it will likely be a long-term winner. But there’s only so much Walmart can control. It can’t force customers to buy more discretionary products. Nor can it wave a magic wand and ease inflationary costs.

As ugly as Walmart stock’s decline has been, it’s important to understand the context. Tuesday’s price decline pushed Walmart stock down to roughly where it was a month ago — which is about the same price as it was after it released its abysmal Q1 fiscal 2023 report. Given Walmart’s updated forecast, the stock probably didn’t deserve to rebound off its lows as quickly as it did. Put another way, it’s not like Walmart stock is 10% lower than when it reported its last quarter. It’s just around the same price now. And that makes sense given the situation hasn’t improved and, if anything, is deteriorating.

What to watch in the months to come

As usual, focusing too much on short-term price movements isn’t very productive. Rather, a better way to approach stocks like Walmart is to think a few years out instead of fixating on the next quarter or two.

Walmart has an excellent management team and market position, and it isn’t an expensive stock based on its forward-adjusted EPS guidance. Walmart earned $6.46 in fiscal 2022 adjusted EPS. Its updated guidance suggests a 12% decline, which would give Walmart fiscal 2023 adjusted EPS of $5.68 — giving it a forward price-to-earnings ratio of 21. 

Walmart’s reasonable valuation and 1.8% dividend yield aren’t a bad option for investors looking for a company they can count on to outlast a prolonged bear market. However, there’s also nothing wrong with waiting for the situation to play out. Walmart will report its Q2 fiscal 2022 earnings on August 16. The results are less important than management’s commentary, which should provide many more details than Monday’s press release as to the state of its inventory issue, the effects of inflation, and how Walmart is navigating stressed supply chains to make sure it isn’t over-ordering for the holiday season.

Investors interested in Walmart stock would do well to listen to management’s tone, not just read the earnings call transcript. Often, listening to the earnings call can give a better reading on management’s confidence. In this case, the significant points to look for are whether the worst of Walmart’s negative growth is over and how it plans on returning to growth.

There’s no rush to go out and buy Walmart stock now, although it does stand out as a well-rounded company that should outperform the retail industry during times of lower consumer spending.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart Inc. The Motley Fool has a disclosure policy.

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