Walmart and Target report higher sales and lower margins
Walmart and Target posted their first quarter results this week and the rivals had similar stories to tell of sales going up and profit margins falling down.
Walmart reported that same-store sales for its U.S. business were up three percent year-over-year in the first quarter and plus nine percent over 2020. The company’s Sam’s Club unit posted comps that were up 10.2 percent and 17.4 percent on a one- and two-year basis.
Both Walmart U.S. and Sam’s saw declines in gross profits due to rising supply chain costs and product mix issues where seasonal merchandise failed to sell due to inclement weather across much of the U.S. heading into spring. Walmart’s gross profit fell 87 basis points during the quarter.
Doug McMillon, president and CEO, Walmart, said the company’s “bottom line 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.”
Walmart’s CEO said yesterday on the company’s earnings call with analysts that general merchandise made up a lower percentage of sales in the first quarter, and that created an “unfavorable gross margin mix.”
Mr. McMillon said that the company incurred “higher costs for containers and storage, and we’ve taken and are taking steps to contain those cost pressures to the first half of this year.”
Fuel costs, a growing challenge since the start of Russia’s invasion of Ukraine, was cited as a factor in Walmart’s lower than expected earnings.
Target today reported that it grew comp sales 3.3 percent during the first quarter on top of a 22.9 percent gain during the same period last year. The chain’s digital comps were up 3.2 percent following a 50.2 percent jump in the first-quarter of 2021.
The retailer’s higher sales, however, could not mask the bottom line issues it must confront.
“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,” said CEO Brian Cornell.
Target pointed to actions it took to reduce excess inventory and higher freight and supply chain costs as major factors affecting its profit margins.
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DISCUSSION QUESTIONS: What do you make of the first quarter results posted by Walmart and Target? What advantages and disadvantages do you see either retailer having versus the other when it comes to maintaining operating margins?