Grocery store spending slowed in April, adding pressure to Walmart margins

Yahoo Finance Live's Akiko Fujita and Brian Cheung discuss U.S. retail sales for April.

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BRIAN CHEUNG: Getting data, covering-- again these are advanced numbers for the month of April, showing retail sales jumping by 0.9% between March and April of this year. Interesting also to see, Akiko, that the monthly numbers for March, the previous month, got sharply--

AKIKO FUJITA: Significant revision.

BRIAN CHEUNG: Significant revision up to 1.4% for that period. Again estimates were around this type of number, retail sales around 1% on a month over month basis, certainly not something you expect to see but in this high inflationary environment, it seemed like the Street was expecting this type of figure. And in fact, if anything perhaps surprised a bit on the downside. Now, of course, don't want to read too much into the inflationary story from this particular report because it's not quite the same thing as the big PCE or the CPI reports but certainly, it shows that the American consumer is not slowing at all.

AKIKO FUJITA: Yeah. Four straight months of gains, we're looking at more spending in places like bars, restaurants, on cars, on furniture. We saw less spending on grocery stores and it's interesting to see that data point today given what we heard from Walmart, which is exactly that, right? Which is that we saw the company say that inflation levels are-- particularly in food and fuel and I'm reading statements here from Doug McMillon, created more pressure on margin, mix, and operating costs than they expected.

And we have seen Walmart shares down significantly today, more than 8%. A miss for them but more importantly to me, it is the commentary that we heard from him about just how consumers are now coping with the higher costs. He said they're not necessarily spending on general merchandise, that cost is now going towards food. And so it's an interesting thing to see, we've been talking about what that tipping point is for consumers, it feels like that mix is slowly starting to shift for the largest retailer.

BRIAN CHEUNG: Yeah. And for those that are wondering, well, what the heck is going on with Walmart here, why is the stock going down by 9% in the morning here? I mean, you look at the figures, they beat on the top line, they did miss on the bottom line. But it's the same story with all the other industries that have reported in this earnings season so far. The numbers for the first three months of 2022 not all that bad from a sales perspective but it really is the guidance going forward that is hurting these companies' trajectories going forward, and that is because of the full scale of the 6%, 7%, 8% year over year inflation that will be reflected in their profit margins as some consumers start to say, you know what? maybe I don't need to buy these things.

But with regards to Walmart, it's just such a unique story that I love to look at because they're such a large employer in this country, they're one of the biggest employers in this country. What was interesting to me was the commentary that management said they actually had an oversupply of workers during the first quarter.

AKIKO FUJITA: Which is kind of similar to what we heard from Amazon as well.

BRIAN CHEUNG: Which again, a huge employer in the United States. So this is effectively the entire US labor force that we're talking about here. But they said that some of that labor scheduling inefficiency was because of the fact that people actually returned from the Omicron wave a bit faster than they had anticipated. They were kind of beefing up staffing levels at the end of next year with the expectation that Omicron was going to wipe out a lot of the availability through a critical holiday and then New Year's season. And then people came back to work and they're like whoa, we have all these workers.

AKIKO FUJITA: There's some overlap that happened.

BRIAN CHEUNG: Yeah.

AKIKO FUJITA: Eventually so they kind of evened out through attrition but they did have that which kind of brought things in terms of costs for the company higher. The other thing I thought was interesting, kind of tying into what we're seeing with retail sales, you know, Doug McMillon said specifically inflation is lifting the average ticket, our transaction count in stores went up slightly versus last year. Overall basket size is up but units per basket are down a bit.

BRIAN CHEUNG: Yeah. And I think that the overall story here is whether or not people are starting to change their consumption behaviors and I think that when we take a look at the retail sales numbers, it's not so clear that Americans are slowing down at least right now but when again you look at the guidance from these companies, they're saying when they say inflation is going to affect profits that's not just some random economic mechanism, it's really demand destruction, people saying, I'm not going to go out and buy these things anymore. Now, who might be a beneficiary of that, you might think it's Walmart but again if the basket for their goods is also increasing and they're paying more from the supply chain perspective that's going to hurt.