In this week’s equity-based roundup, our focus is on Walmart Inc. Walmart Inc. offers shopping opportunities in both retail stores, as well as through e-commerce, and provides access to its other service offerings.
On Tuesday, November 15, 2022, the company released its Q3 results and also announced its intention to pay $3.1 billion as part of a nationwide opioid lawsuit settlement agreement over the impact of their pharmacies’ prescriptions of opioid painkillers.
The retail giant’s announcement follows similar proposals on November 2, from CVS Health and Walgreen Co, which said they would pay about $5 billion.
The deal, which is to be approved by 43 States, will provide “significant aid” to communities around the country as they fight against the opioid epidemic. Also, the settlement is expected to resolve the bulk of all potential opioid lawsuits, filed by state, local and tribal governments against Walmart.
Reaching the settlement, Walmart noted that it does not admit liability with the settlement. In a statement, Walmart said it “strongly disputes the allegations in these matters, and this settlement framework does not include any admission of liability.”
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On the same day, it announced the ‘opioid’ settlement, the retail giant raised investors’ spirit by beating earnings estimates and raising its full-year outlook. Revenue came in at $152.81 billion globally, significantly beating the expected $147.75 billion.
It posted a net loss of $1.8 billion, or 66 cents per share, down from a profit of $3.11 billion, or $1.11 per share, a year earlier.
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Full-year outlook: The company now expects consolidated net sales for the year to grow about 5.5% or 6.5%, excluding divestitures. And based on current exchange rates, the company expects a headwind of about $4.1 billion for the year.
It expects an adjusted operating income decline of 6.5% to 7.5% from prior guidance of a decline of 9% to 11%.
The CEO, MicMillon said on a call with investors, “it was a good quarter. We delivered strong results on the top line across our segments, and our value proposition is resonating with customers and members around the world. We see this in our grocery business in stores and online in key markets like the US and Mexico. Customers that came to us less frequently in the past are now shopping with us more often, including higher-income customers.”
The company also informed that the growth in the grocery business was fuelled by the rising traffic of higher-income households trading down in order to save a few dollars and lower-income households spending more on foods, leaving discretionary items.
Chief Financial Officer John David Rainey said,
“Consumers are watching how they spend and trading down to cheaper items, such as hot dogs and beans.”
The discounter also affirmed that it has made progress with the industry-wide headache; a glut of excess inventory. Globally, its inventory was up 13% year-on-year in the third quarter. Just a year ago, Walmart, like its peers, struggled to keep shelves and warehouses full as inventory around the world was stuck in a supply chain traffic squeeze.
Perspective: While several retailers are yet to report their results this week, the results from the world’s largest retailer summarily show that inflation is really affecting the balance sheet of consumers and the bottom line of the retail giant.
Reading between the lines, it seems Walmart is in trouble. First, the ‘opioid’ settlement took a swipe at the company’s bottom line. Consolidated operating expenses as a percentage of net sales increased 144 basis points due to charges of $3.3 billion related to opioid legal settlements.
In its fiscal year outlook, Walmart said, it is bracing for a possible decline in its profit margin due to rising costs. Also, the downgrading of its adjusted operating income forecast to 7.5% from prior guidance of 11% further highlights this.
After the release of its first-quarter earnings, it became exceptionally clear that it did not meet investors’ expectations. Investors expected a $1.48 profit/share, but Walmart reported a $1.30 profit/share, and needless to say investors are not happy.
After the release of its first quarter result in July, the market reacted sharply to its announcement to cut its profit expectation as its shares fell more than 8% a day.
For years, Walmart was the competitor feared most, but new numbers show that the retailer has been falling behind in recent years. In Q3, profit was down by almost 156% compared to a year ago, which means the world’s largest retailer performed worse than last year. As the world’s largest retailer, even a 1% drop in earnings can be translated into billions in losses.
Even profit has turned out to be the least of Walmart’s problems. The retailers’ free cash flow for the nine months ended October 31, 2022, declined by $4.1 billion when compared to the same period in the prior year. The decline in free cash flow is due to the decline in operating cash flows by $0.6 billion, as well as an increase of $3.5 billion in capital expenditures.
Albeit, during the quarter, the company returned $4.5 billion to shareholders through dividends and share repurchases and is committed to continuing to provide strong cash returns to shareholders while still appropriately investing in our business for the long term. According to a statement, the board has just approved a new $20 billion share repurchase authorization that we expect to utilize over the next several years. This is a good one for investors.