Walmart
Walmart U.S. drove a +7.4% comparable-store sales increase during Q1 2023, with both ticket and transactions increasing and helping to lift its trailing-twelve-month sales per square foot from $619 to $628. Grocery was the key driver with Walmart posting grocery comps of roughly +12%, but the retailer also saw contribution from pharmacy due to sales of Eli Lilly’s Mounjaro (its weight loss drug). On the other hand, general merchandise in the store (excluding e-commerce) was down mid-teens as customers are shopping closer to need, trading down, and cutting back. Other headwinds called out by management included bad weather, lower tax refunds, and lower SNAP benefit payments (echoing sentiment from other retailers). Management indicated that they did not expect the business mix(i.e., an inflection in general merchandise sales) to materially improve for the remainder of the year. The company saw incremental slowdown in middle-income consumers--a cohort the company had made gains with during the back half of 2022--with concerns that wage growth could slow in 2H 2023 and yield a next-level impact on the lower-income consumer. For Q2 2023, management’s guidance implies another significant decline (low-teens) for general merchandise at stores. That rate of market decline will take a larger toll on Target given its greater sales mix (52%) in these categories.
As it relates to omnichannel, Walmart was able to produce another impressive +27% gain in e-commerce and a +40% increase in retail media advertising revenue. Recall from our Q4 2022 update that Walmart’s marketplace and its third-party fulfillment services are yielding significant adoption among third-party sellers (meaning it is offering consumers a wider selection) and its fulfillment speed (2-3 days) is increasing convenience and conversion rates (fulfillment by Walmart orders doubled year-over-year). That improved momentum draws in more sellers (+40% year-over-year) and shoppers which drives the flywheel. Walmart can monetize the increasing data coming out of that flywheel, be it through advertising or more topical and relevant merchandising decisions for the site and the individual stores and the markets in which they reside (i.e., better local relevance, which is hard to do at the scale of 4,900+ large format stores). Walmart has studied Amazon for decades, it knows the plays that have served Amazon well, and it has finally reached the inflection point play on scale.
Walmart was able to control expenses well, as selling, general & administrative (SG&A) expenses increased less than sales. Compared to 2019, comparable sales are up +29% and SG&A costs per square foot is up similarly. For most retailers, this is not the case given industry-wide inflationary cost pressures (Historically, Walmart has been better able to manage its overall wage cost pressure because of lower competition for workers in many of its rural markets). As it related to the competitive environment, Walmart CEO Doug McMillon said, “[We are] pivoting where our investments are more focused on capital investments than income statement investments (i.e., promotions). And we'll continue to proceed to invest in the supply chain (i.e., in-stock levels), [and remodels]…when I think of the word, investment, I think more about those things than I do necessarily income statement investments…[and] because inventory is in a better spot than it was last summer, for example, [we] can focus more on [being merchants] rather than just dealing with the flow of inventory that was coming in.’’ (In summary, Walmart is a position to strongly execute.)
We had titled our 4Q 2022 update Walmart’s 2023: Helping People Save Money and Live a Better Life because we expected Walmart to push back on nationally branded food manufacturers’ price increases in 2023 and to further ramp up its own supply of Walmart-branded packaged food offerings. When we didn’t hear about that at its recent investor meeting, we feared that we may have misread between the lines. We had not. Walmart and Target’s business and profit mix is under pressure because consumers don’t have enough discretionary dollars as high packaged food inflation keeps gobbling up their limited budgets. McMillion noted, “In the dry grocery and consumables categories like paper goods, we continue to see high single-digit to low double-digit cost inflation. We all need those prices to come down. The persistently high rates of inflation in these categories lasting for such a long period of time are weighing on some of the families we serve. This stubborn inflation in dry grocery and consumables is one of the key factors creating uncertainty for us in the back half of the year because of the cumulative impact on discretionary spending in other categories, specifically general merchandise…As we look ahead to Q2 and the rest of the year, we're focused on getting our merchandise costs and retails down to fight inflation for our customers and members, which will help us with mix...[Working] with those suppliers that are on the prepared foods and consumable categories to get costs down more as fast as we possibly can would help them drive unit volume, would help us with mix and free up cash for customers to use for discretionary goods. And that's what we're focused on, have been focused on, and it's just taking longer in those categories than we want.”
Walmart shared that for Q1, private label penetration (their own brands) increased 110 bps in the grocery sales mix, which implies around +5.5% in units. In contrast, national brands would be down slightly. As the table below shows, Walmart-grocery comps have consistently been 2X that of the conventional grocers on a 1-year basis and 1.5X on a two-year basis. We would expect those ratios to hold in the 2H. (Remember that Walmart is the largest grocer in the U.S. with over 25% market share.)
Target
On its 1Q 2023 update call, Target’s CEO Brian Cornell noted, “As it did throughout last year, pressure from inflation and rising interest rates affected the mix of retail spending in Q1, with a further softening in discretionary categories in the March and April time frame.” CFO Michael Fiddelke added, “More specifically, we began the quarter with positive comp growth in the month of February and then saw the trends soften into low single-digit declines by the end of April and so far into May.” Notable for Target’s earnings release was management's expectation for a softer Q2 2023 with comp sales forecasted to decline in the low-single-digit range and an extremely wide earnings per share (EPS) range outlook of $1.30-1.70 per share (which implies a range of ~$230M in net profits). Our data indicates that Target outperformed Walmart with respect to in-store visits (below); however, Walmart also produced strong e-commerce growth which is not captured in our foot traffic data. Walmart has also noted stronger trends by more affluent households, and so while it may be losing some trips by less affluent households, it is mixing up in affluence and spend per visit.
Of particular note in Target’s release was the explicit communication that shrink would be $500M worse this year, on top of last year’s $600M figure, or $1.1B combined (above the unknown base level in 2021). On the call, Cornell said, “Theft and organized retail crime are increasingly urgent issues, impacting the team and our guests and other retailers. The problem affects all of us, limiting product availability, creating a less convenient shopping experience and putting our team and guests in harm's way. The unfortunate fact is violent incidents are increasing at our stores and across the entire retail industry. And when products are stolen, simply put, they're no longer available for our guests who depend on them, and left unchecked, theft and organized retail crime degrade the communities we call home…As a result, we are engaged in a variety of mitigation efforts, which began with significant resource investments to protect our team and our guests. In addition, we're installing pictures to protect merchandise and adjusting our assortment in affected stores. Beyond safety concerns, worsening shrink rates are putting significant pressure on our financial results…That's why we're actively collaborating with legislators, law enforcement and retail industry partners to advocate for public policy solutions to combat organized retail crime. As we communicate with those partners, we emphasize that we're focused on keeping our stores open in the markets where problems are occurring. Our stores create jobs, serve local shoppers and act as critical hubs in communities across the country and we'll continue to do everything in our power to keep our doors open.” (Readers will recall some recent very high-profile retailer store closures and market exit announcements.)
As it relates to business execution, readers will recall that Target's primary objective last quarter was getting their inventories clean. The retailer was able to keep it that way, as inventory turns were a very healthy 5.8X (quite a positive development given the softer consumer spending). Cornell noted, “Our cautious posture has not reduced our commitment to offering fresh, on-trend merchandise throughout the year. We know that newness is a critical element of what our guests expect when they shop with us. And even if they manage their household budgets and make disciplined buying choices, our guests continue to respond when we offer the right combination of newness, trend right fashion and affordability.”
As expected, sales of beauty, food & beverage, and household essentials drove sales, with discretionary categories down. Target Chief Merchant Chistina Hennington said, “With a balance of strong opening price points, timely and relevant promotions, as well as a mix of competitively priced national brands and high-quality and affordable owned brand offerings, we have an opportunity to boldly demonstrate the power of Target's value proposition to our guests…Given that consumers are cautious when buying discretionary items, we are being more declarative than ever about affordable joy and leaning into value messaging across all our media channels, in-store signing, merchandise displays, and through our digital platforms.” Given the shift in the company’s consumer messaging and the sales mix towards everyday essentials, that is diving up both store traffic and conversion rate. Store comparable transactions were up an estimated +1.5% and store comp sales were up +0.7%, whereas “digitally-originated comp sales” were down -3.4%. Of note, its curbside business grew high single-digits for the period; if those sales were recorded as store sales, store comparable transactions would have been +2.1% and comparable sales would have increased +1.3%.
There doesn’t appear to be any notable regional disparities in visits per Placer.ai. As such, we would characterize the overall consumer malaise as nationwide and “general in nature.” Given that it’s a general malaise, we would refer readers to our preview of the retail environment for spring/ summer and our Holiday 2023 & Beyond Outlook. What we are most concerned about as a potential second shoe to drop is the restart of student loan repayments in the late summer/early fall, which we have penciled-in at $4K per borrower per year for those between 25-35 years of age.
