Walmart's earnings may signal if shoppers are spending or getting spooked by inflation

When Walmart reports quarterly earnings Thursday, investors will scour sales numbers and executives’ comments for clues about whether rising prices are making shoppers skittish.

The retail giant is closely watched as a bellwether of inflation.

“Any sort of wavering in behavior, they’re going to detect it,” said Steph Wissink, a retail analyst at Jefferies. “The voice of Walmart carries more weight in the context of ‘How healthy is the consumer?'”

Inflation has risen rapidly, raising questions about what that means for Americans’ spending habits after a pandemic- and stimulus-fueled spending spree. The consumer price index rose by 7.5% in January compared with a year earlier, according to the Bureau of Labor Statistics, and marked the fastest increase 40 years. Food costs have increased 7% on a 12-month basis and are closely watched because groceries are households’ most frequent purchases.

Major consumer goods companies, including PepsiCo, Hershey, Coca-Cola and Proctor & Gamble, have passed on price increases to customers — and argued brand loyalty has kept sales strong. Pepsi executives said on an earnings call last week that shoppers will pay more for their favorite snacks and beverages, such as Gatorade. Many of those products are on Walmart’s shelves.

Wissink, however, said the backdrop is changing: Consumers spent freely during the holiday season, though challenged by out-of-stocks, shipping delays and other supply chain snarls. Walmart’s report, which will capture its earnings for the three months ended Jan. 31, will include the holiday season. But investors will be most eager to hear about trends over the last few weeks.

Wissink said consumers may be starting to think twice before opening their wallets as prices creep higher week after week, and they no longer receive stimulus checks from the government.

Walmart has a unique window into consumers’ mindset: Nearly 90% of Americans live within 10 miles of its stores, cutting across different states, geographic areas and income levels. Food, one of the major categories hit by inflation and a frequent purchase for households, accounts for nearly 60% of its net sales in the U.S., based on sales figures from the nine months of the fiscal year.

Analysts are mixed about whether inflation will help or hurt Walmart’s sales — and its margins.

Wissink said lower-income customers may buy less, but Walmart will pick up a larger portion of middle- and upper-income shoppers’ wallets because of the retailer’s reputation for value. She has a buy rating on the company’s shares and her price target is $184, about 37% above where the stock is currently trading. That’s higher than analysts’ average price target of $165.44, according to Refinitiv.

Scot Ciccarelli, a retail analyst at Truist Securities, however, said Walmart customers who feel pinched have few places to turn to for lower prices, besides perhaps privately owned German discounter Aldi or dollar stores like Dollar General. He said that translates to a pullback in overall spending and an upward battle for Walmart as it tries to grow.

His rating for the company is neutral and price target is $153.

Walmart CEO Doug McMillon has said the retailer can use inflation as a competitive advantage. In mid-November, McMillon told CNBC’s “Squawk Box” that the company will undercut rivals and win market share by absorbing some rising costs of shipping, labor and materials rather than passing all of them on in the form of price increases.

Those comments — and similar ones by Target — sparked a sell-off.

Walmart has not yet provided an outlook for the year ahead, which is fiscal 2023. Analysts anticipate earnings of $6.70 per share on revenue of $588.36 billion for the full year, up from an estimated $6.42 on revenue of $571.45 billion for fiscal 2022.

In periods of inflation, shoppers tend to follow a familiar script: Spending more at value retailers. Using coupons and hunting store aisles for discounted items. Trading down to cheaper brands, such as a grocers’ private labels. Buying smaller packs. And skipping discretionary items, such as a new shirt or a gallon of ice cream.

Shoppers have noticed price hikes and begun to adjust in some of those ways, said Krishnakumar Davey, president of strategic analytics at IRI. More than 90% of consumers said they were concerned or extremely concerned over rising grocery prices, according to a survey of more than 900 consumers by the market research firm in early January.

According to the survey, 67% of low- and middle-income consumers and roughly half of high-income consumers said they are changing shopping choices due to increased grocery prices. Nearly half of low- and middle-income consumers say they’re looking for more sales and deals and a third of them said they’re cutting back on nonessentials.

Davey said inflation may also trigger the reversal of pandemic patterns. Americans had traded up to pricier food and beverages — such as a higher-end steak or a gourmet pasta sauce — to mimic the restaurant experience as they had fewer other places to spend their dollars. To reduce Covid exposure, they consolidated store trips and filled up bigger baskets.

In the coming months, he said retailers may see “cherry-picking” as cash-strapped shoppers go to numerous different stores based on prices of staples like milk, eggs and meat.

Walmart has missed out on stock gains over the past year. Shares of the company are down 7% over the past 12 months, lagging behind the 14% advance of the S&P 500 and the 2% gain of an exchange-traded fund for the retail sector, as of Tuesday’s close.

Walmart shares ended at $134.37 on Tuesday, up less than 1%. The company’s market value is $372.73 billion.

Along with holiday results and impacts of inflation, Chuck Grom, a retail analyst at Gordon Haskett, said he wants to hear updates on Walmart’s efforts to make money in new ways. It is trying to grow its ads business, Walmart Connect; subscription service, Walmart+; and delivery business, GoLocal.

Grom said other retailers have clearly emerged from the pandemic stronger. Target won more shoppers with its same-day services, such as curbside pickup and home deliveries through Shipt. More Americans joined and renewed memberships at warehouse clubs like Walmart-owned Sam’s Club, Costco and BJ’s Wholesale. And Home Depot and Lowe’s fueled a newfound interest in home improvement and landscaping projects.

For Walmart, he said, the jury is out.

“Investors are trying to decipher ‘Has Walmart been a Covid winner? Is Walmart a better business today than it was two years ago?’ And I don’t know if you could really argue that.”