Walmart beats earnings estimates, raises outlook as inventory improves

Yahoo Finance Live anchors discuss the rise in stock for Walmart following third-quarter earnings.

Video transcript

[AUDIO LOGO]

BRIAN SOZZI: All right, here are three things you need to know right now.

Shares of Walmart are surging this morning after the retailer beat earnings and revenue estimates in the third quarter and raised its full-year profit outlook as groceries boosted sales. And wow, Walmart top ticker on the Yahoo! Finance platform this morning and with good reason.

This is really, I would say, a complete change of tone in what we heard from Walmart relative to three months ago. Back then, when we talked-- when I talked to Walmart CFO John David Rainey-- we'll talk to him soon-- he was talking about consumers trading down to tuna fish and a more cautious consumer.

Now, we have Walmart here bringing down its level of inventory, showing that margins holding up there despite inflationary pressures. And you also have Citi out here with a note right now saying, this is a grand slam, home run quarter.

BRAD SMITH: Yeah, some of the highlights here from the third quarter. Comp sales, they grew by about 8.2% during the quarter. You saw that also on this kind of two-year stack that they report for now. That was up by about 17.4%.

And E-commerce growth, that continues to help out the business. That was up by about 16%. And then lastly here, their advertising business, which I'm gonna be interested in actually asking about when we talked to the CFO a little bit later.

BRIAN SOZZI: You love those advertising businesses.

BRAD SMITH: I really do.

BRIAN SOZZI: I see your face just lights up. I always see it. I always see it.

BRAD SMITH: It is such a high-margin business but low effort for a company that's already got the platform to be able to sell some of that insertion order out to some of the-- some of the prospective marketers.

JULIE HYMAN: I'm gonna push back a little bit on everything being so rosy, right? In terms of the implications because--

BRIAN SOZZI: I would expect nothing different.

JULIE HYMAN: Listen, no, but people are still trading down.

BRIAN SOZZI: Yes.

JULIE HYMAN: And the way that they brought down that inventory was in part by keeping that price discipline, right? They sold stuff because it was cheap. And the company even says, its gross profit rate was down by 77 basis points because increased general merchandise markdowns pressured gross margins.

So that worked out in inventory. While it is a positive and while, of course, the comp sales increases, which are impressive, are a positive, it didn't come at no cost, right? The company did have to mark down some stuff.

And what's interesting here is that you did see low single-digit increase-- or negative low single-digit decline in general merchandise, even with those markdowns. So the dynamic hasn't changed. It's just that Walmart has changed to meet the dynamic--

BRAD SMITH: Yeah.

JULIE HYMAN: --if that makes sense, right? People still aren't necessarily buying as much general merchandise. In fact, they're buying less general merchandise--

BRAD SMITH: Right.

JULIE HYMAN: --than they were at Walmart. But they're buying more grocery. They're buying more health and wellness. And the company has adjusted its inventory to meet those changes in demand.

BRAD SMITH: To your point, general merchandise sales, they said that declined on some type of comparables. But still, a decline in general merchandise sales, softness in a few key categories here, consumer discretionary categories, including electronics, home, and apparel, and that could actually prove to pass through to some of the other big earnings reports that are still set to come over this season.

BRIAN SOZZI: Right, that is grand slam, home run analysis, Julie. I think that's awesome because I think you absolutely nailed it. And that graphic we were just showing by sales, by category at Walmart US, to your point, it does show a increasingly stressed, lower-income shopper. But also like we talked about with one of our guests yesterday, I think was Deborah Weinswig, a trade down by people probably making over $100,000 or more a year in this inflationary environment, they're going to Walmart and I think being surprised by the selection and the prices they have.

And I also would add this, I would be concerned about what Target puts up when they report earnings soon. There was already some whisper-- whispers on the Street that they come out here and lower their fourth-quarter guidance. If Walmart is seeing pressure in discretionary categories, that's Target's bread-and-butter business. So you probably have to be a little more concern on what Target puts up soon.

BRAD SMITH: Yeah, you know--

JULIE HYMAN: So--

BRAD SMITH: Sorry, go ahead.

JULIE HYMAN: Go ahead.

BRAD SMITH: I was just going to say, you don't come across too many other significant bellwethers that compare even to Walmart. So if they are signaling it, to your point, Brian, then it's more than likely that some of the other kind of key category players are also gonna be experiencing the same effects.

JULIE HYMAN: So for the full year, just to put a fine point on the forecast that's coming from the company, earnings are still gonna decline for the full year. They're just not gonna decline as much as the company forecast before. So a drop of 6% to 7% compared with a 9% to 11% drop that was the prior forecast.

And one more thing to mention that I don't think we touched on yet is the buyback. Did we talk about the buyback?

BRIAN SOZZI: $20 billion.

BRAD SMITH: We did not.

JULIE HYMAN: $20 billion buyback. So that's-- you know, that's significant as well that they're returning cash to shareholders. And sometimes when companies come out and do this and increase the size of their buyback-- and remember, they don't have to buy back all that stock, they're just authorized to do so. But sometimes it feels a little bit like a like a mea culpa, doesn't it?

BRAD SMITH: Yeah.

JULIE HYMAN: Like, we've had a little bit of a hard time in the prior quarters. Now, we've got the train back on track. And by the way, as an added bonus, we're gonna buy back some stock and return cash to shareholders.

BRAD SMITH: One other big part of this, too, that we didn't mention, Walmart also agreeing $3 billion-- over $3 billion payment to--

JULIE HYMAN: Oh, yes.

BRAD SMITH: --settle some of the opioid crisis lawsuits. We know that had been brought by a couple of states and municipalities. So it seems like that's gonna continue to move forward. There were other companies that were also pulled into this as well. They have different payment schedules, though. I think CVS's is over 10 years and Walgreens' over 15 years as well.