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What Trump’s Tariff Tweet Probably Got Wrong About Walmart’s Q3

Walmart Inc. bested Wall Street’s third-quarter profit estimates–although much of that increase was due to its growth in food and groceries–while President Trump’s tweet indicating the retailer saw no impact from tariffs wasn’t entirely accurate.

In a Nutshell: Walmart had a very good third quarter, beating EPS estimates by 7 cents. That prompted an early-morning tweet from Trump that said, “Walmart announces great numbers. No impact from Tariffs (which are contributing $Billions to our Treasury).”

While Trump was correct that Walmart posted “great numbers,” his “no impact” assumption is debatable.

Walmart executives have been monitoring the tariff issue and its possible impact on the company for months. In May, executive vice president and chief financial officer Brett Biggs said the company’s goal is to always be the low-price leader, and that Walmart “will actively manage pricing and margins as warranted with our customers and shareholders in mind.”

At the time, total inventory for Walmart U.S. operations rose 5.9 percent for the quarter, which Biggs said was “due to some accelerated buying in certain categories.” That suggests Walmart might have been mitigating an anticipated tariff increase by ordering more goods ahead of time, or planning for seasonal sales.

Retail consultants, such as Walter Loeb, have noted that most retailers didn’t have to raise prices over the summer or for holiday because they already had ordered goods ahead of time in anticipation of tariff hikes.

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Biggs’ emphasis on how company merchants continue to execute appropriate mitigation strategies to enable it to be the low-price leader didn’t change in August when the discounter posted second-quarter results. And on Thursday, in the latest prepared fireside chat, Biggs again noted the ability of Walmart merchants to “execute appropriate mitigation strategies.”

Mitigation strategies–such as asking suppliers to share in any cost increases–help a retailer maintain pricing for customers, but usually have an impact on the back end in connection to margins and profits if it has to absorb some of the costs to maintain its pricing structure. Then the retailer has to hope it can recover some of that hit elsewhere, such as in operations, to keep profits intact–and it appears that Walmart was able to do just that.

But this time the message from Biggs on Thursday suggested Walmart could be seeing some margin impact from tariffs. Walmart U.S.’s gross margin rate declined 4 basis points year-over-year for the quarter, the CFO said, adding, “Continued price investments pressured gross profit but were partially offset by lower supply chain costs and better merchandise mix including strength in private brands.”

While the overall business at the discounter fared well in the quarter, covering July, August and September, much of its growth has been in the fresh food and grocery categories.

Doug McMillon, Walmart’s president and CEO, also in prepared remarks, said, “We continue to see good traffic in our stores. We’re growing market share in key food and consumables categories, including fresh, and we had positive comps in general merchandise.” Home and hardlines contributed to the up low-single-digit comp report, while unseasonable weather led to softness in apparel, the company said.

McMillon also noted that the company is making progress on many fronts, but that the company needs to do more and move faster, especially with its assortment. “Our strength is being driven by food, which is good, but we need even more progress on Walmart.com with general merchandise. We’re mixing the business out better to achieve better margin rates, but there is more work to do,” he said.

Charlie O’Shea, retail credit analyst at ratings firm Moody’s Investors Service, said the retailer’s performance in the U.S. “continues to reinforce the quality of its execution and sensibility of its strategic investments, with online and grocery the prime beneficiaries.” Walmart’s operating discipline will come in handy “during what is shaping up to be yet another acutely-promotional holiday season,” he noted.

Net Sales: Total revenues rose 2.5 percent for the three months ended Oct. 25 to $128.0 million from $124.9 million. U.S. comp sales rose 6.6 percent on a two-year stacked basis. Market share gains were led by food and consumables, including fresh, the mass discounter said.

The company said U.S. e-commerce sales jumped 41 percent in the quarter, which includes “strong growth in online grocery.”

Net sales at Walmart U.S. stores rose 3.2 percent to $83.2 million, and rose 1.3 percent to $29.2 billion at Walmart International. Walmart said the inclusion of Flipkart and strength in Walmex and China in its overseas segment were partially offset by softness in the U.K.

Biggs said that the U.S. supercenter is a great asset for the company and that it is finding new ways to leverage it, such as the expansion of its Delivery Unlimited membership program, the launch of its unattended in-home grocery delivery service, and the opening of the first-of-it-kind Walmart Health Center.

Biggs added that while comp sales growth reflected strength across key categories, it was fresh food that was “particularly strong this quarter with mid-single digit comp sales growth as improvements in areas like bakery and meats are resonating with customers.”

In international operations, Biggs said China saw net sales rise 6.3 percent and comp sales were up 3.7 percent. In Mexico, comp sales rose 3.8 percent, while in Canada comp sales were up 1.9 percent. In the U.K., comp sales fell 0.5 percent due to “customers’ concerns over Brexit,” which he said continued to weigh on results.

Earnings: The discounter said GAAP earnings per share were $1.15, while adjusted EPS was $1.16, led by strength at its Walmart U.S. division.

Wall Street was expecting adjusted EPS of $1.09 on revenues of $128.65 billion.

The company raised guidance for fiscal 2020 EPS, stating that it is “now expected to increase slightly compared to [fiscal year 2019] adjusted EPS, including Flipkart.” Last year, fiscal 2019, the discounter reported GAAP EPS at $2.26 and adjusted EPS at $4.91. Fiscal 2020 has a 53-week reporting calendar, compared with the 52 weeks in fiscal 2019.

CFO Biggs said the company’s guidance did not include any potential change in the future value of its investment in JD.com, and Walmart continues to assess the ongoing civil unrest in Chile. He also noted that guidance assumptions include the company’s “current understanding of the timing of tariff implementation on various categories.”

CEO’s Take: McMillon said: “Our work to create a seamless omnichannel experience for customers continue. They want us to save them time as well as money.” He said the company is taking learnings from its expansion of services such as online grocery, which includes pickup, delivery or both in nearly a dozen countries including the U.S., and will use the knowledge to “inform the new capabilities we build and deepen our relationship with customers.”

The CEO also noted, “I continue to challenge the team to drive a deeper, more sustainable relationship with the customer, better execute the fundamentals, and improve the overall economics of the business.”