Walmart's caution on consumer spending ahead of holidays sends shares lower

By Siddharth Cavale and Aishwarya Venugopal

(Reuters) - Walmart on Thursday said that the U.S. consumer continued to exert caution with their spending in the face of inflation and rising interest rates, even as the retailer raised its forecast for sales and profit for the year, sending its shares down 6.4% in premarket trading.

Walmart's bigger focus on groceries has provided a bulwark against the broad slowdown in discretionary spending with more than half of the company's merchandise comprising of food, and other daily essentials.

But with higher interest rates kicking in and household savings dwindling, sales have been "somewhat uneven" over the past two months, executives noted on a post-earnings call, giving them pause on the state on the consumer.

Walmart's Chief Financial Officer John David Rainey told Reuters the company saw shoppers slow down purchases in the second-half of October, and then pick up spending in the early part of November, on items including apparel and home goods, that have been out of favor for most of the year.

"This gives us reason to think slightly more cautiously about the consumer versus 90 days ago," Rainey said on the conference call.

While shopper visits rose 3.5% in the third quarter, shoppers are "still very choiceful and using discretion" and are waiting for promotional events like Black Friday and Cyber Monday, he said, echoing comments made by Target CEO Brian Cornell on Wednesday.

Core U.S. retail sales rose 0.2% in October as spending ebbed due to higher borrowing costs and the lingering effects from inflation.

CAUTIOUS ON THE CONSUMER

Retailers have been forecasting a less-robust holiday season than in years past. In addition to Walmart, retailers Children's Place and Bath & Body Works also reported mixed quarterly results Thursday. Macy's had strong results.

"With this type of volatility, we think it does make sense for Walmart to be slightly more cautious on the consumer heading into the holiday season, " D.A. Davidson analyst Michael Baker said in a note.

But the forecast, which according to Art Hogan, chief market strategist at B Riley Wealth, missed the midpoint of Wall Street estimates, sets up sets up Walmart for "another beat," Baker said.

Walmart has used its size and scale to keep prices low despite inflation, drawing in not just low-income shoppers but also more high-income consumers looking for cheaper options to stretch their budgets.

Prices on food and consumables have been "more in check" than the prior year while prices of general merchandise goods like apparel and home goods have fallen between three and six percent, Rainey said.

Falling prices in general merchandise will allow Walmart to cut prices for the holiday season, executives said on the conference call.

Walmart shares fell as much as 8% in premarket trading, a day after its stock hit an all-time high of $169.91 following results from rival Target, which projected fourth-quarter earnings above estimates.

Walmart's shares are up nearly 20% this year and are relatively more expensive than peers.

Walmart now expects fiscal 2024 earnings per share between $6.40 and $6.48, up from its prior forecast of $6.36 to $6.46.

It sees comparable sales for the full year rising 5% to 5.5%, compared with an increase between 4% and 4.5% estimated previously.

Comparable sales, or sales at Walmart's U.S. stores open at least a year, rose 4.9% ended Oct. 31, excluding fuel, above estimates of 3.35%. Online sales rose 15%.

The company posted an adjusted profit of $1.53 per share in the third quarter. Analysts on average were expecting $1.52 per share.

(Reporting by Siddharth Cavale in New York and Deborah Sophia in Bengaluru; editing by Susan Fenton and Nick Zieminski)