Why Walmart's Profit Warning Is Good News For Groceries

Although Walmart isn't expected to report its earnings for another few weeks, or on August 16 per Nasdaq, investors who have parked their money in Walmart stock are already dreading what is to come. Earlier this week, Walmart issued a profit warning, which flagged investors that Walmart's customers are feeling the impact of higher food prices caused by inflation. As a result, the company's earnings per share — or the amount a company earns divided by the amount of common stock, per Investopedia — for the upcoming quarter could fall by 8% to 9%, while its earnings per share for the year could fall by as much as 1%, per CNBC.

Walmart doesn't think it is going to meet earnings expectations because people are spending more on groceries, leaving little room in their budgets for other things, per CNBC. As you may recall, Walmart wrapped up the last quarter with an eye-watering increase of 32% of Walmart inventory surpluses. One employee told Business Insider that there was so much unsold stuff that "I can't even get close to the pallets I need. Our store has never looked this bad. It's just overwhelming at this point." Still, none of this should come as a surprise, since as Business Insider reports, Walmart CEO Doug McMillion had already warned that the company "would work through excess goods over the next couple of quarters."

But not every aspect of Walmart's business is suffering from a dip in demand. In its press release, the company said, "Customers are choosing Walmart to save money during this inflationary period, and this is reflected in the company's continued market share gains in grocery." 

Walmart isn't the only store that is seeing its grocery division do well, since  Albertson's has already reported "better than expected store sales growth of 6.8% for the period ending in June." Because of this, The Wall Street Journal predicts that stores that rely on grocery sales for their bottom line, like Dollar General and Kroger, may see solid results this quarter too. At the same time, the publication says the outlook is a warning sign for other companies that, like Walmart, carry a mix of general merchandise and groceries — because this means they could end up suffering the same fate. Still, this optimism comes with a warning: If inflation goes up too high, even groceries could start seeing earnings fall as consumers bypass them in search of bargains.

While it may be tempting to say that Walmart's performance isn't an indicator of how its competitors will do, stock analysts tend to read Walmart's spreadsheets as eagerly as a fortune teller reads tea leaves. As CNBC points out, because Walmart is America's biggest grocer, it is considered by many as a bellweather for the country's economy.