The state of US retail: Amazon vs Walmart

Stock markets are showing signs of strong resilience once again this week. Earnings reports have been broadly positive and/or ‘not as bad as feared’, and confirmation that the US is now in technical recession hasn’t phased the equity bulls so far with the S&P 500 up by more than 4% over two days.

Retail giant Walmart was one of the first companies to face the market’s judgement, and… it didn’t go well. The share price gapped down by over 9%...

It was mainly a story of spending and inventories. Doug McMillon President and CEO of Walmart explained:

"The increasing levels of food and fuel inflation are affecting how customers spend…We're now anticipating more pressure on general merchandise in the back half"

This is a problem that Walmart is exceptionally exposed to. Back in May, the retailer had already flagged that they were sitting on $60bn of excess inventory and price cuts would likely be required to clear this.

The company confirmed this week that further price cuts will likely be required to clear the excess. Excluding divestitures, full-year earnings per share are expected to drop by 10% to 12%.

McMillon summed up the overall picture in the press release:

“Across our businesses, we had a strong topline quarter. We’re grateful to our associates for their hard work and creativity. Bottomline results were unexpected and reflect the unusual environment. U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected. We’re adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future.”

Simplifying that corporate statement: overall revenues were strong, but profits are taking a hit due to inflation impacting the customer (spending less, favouring lower-priced goods) while simultaneously increasing company overheads, squeezing the profit margin from both sides. But the company is adjusting and adapting to this environment.

A report from Business Insider (citing a leaked internal memo) suggests that automation and AI may have played a part in the inventory overstock. ISA is a computer-generated algorithm for determining orders, introduced by Walmart a few years ago, and the memo implies that it has mis-managed the ordering process, causing or contributing to inventories piling up.

Either way, it looks like the issue is being dealt with now, and after the initial earnings shock, Walmart rallied above the 20 day moving average and reversed most of the earnings price gap.

In contrast, Amazon’s earnings report on Thursday night was received far more positively by the market. The share price rallied by over 12%! Here’s the after-hours chart:

Amazon actually lost $2bn across the quarter, mainly due to a further writedown in the fateful Rivian investment (-$3.9bn), but the growth in Amazon Web Services was a big boost. The cloud computing arm raked in a $3.3 billion profit, smashing the average analyst (Factset) estimate of $1.8 billion.

Looking ahead, Amazon is projecting sales of between $125bn & $130bn over the next quarter, with Chief Executive Jassy adding that the company is "seeing revenue accelerate as we continue to make Prime even better for members, both investing in faster shipping speeds, and adding unique benefits such as free delivery from Grubhub for a year."

A man with a plan. Will it be enough to see Amazon’s share price claw back the year's losses?