Can Walmart get customers to return?

Inflation is weighing on the retail sector, but with Walmart having already given out the bad news at the start of the season, is there a chance for a rebound?
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Getting with the trends

Back on July 25, Walmart cut its guidance for the second quarter and the rest of the year and dragged down the entire retail sector with it. Before, the company expected profit to be flat, but now sees EPS down 11-13% compared to the year prior. The main culprit is the shift in shopping patterns. Walmart expects sales to increase 5.5% over the prior year, which is below the inflation rate.

The company blames a shift in shopping patterns because of high inflation. Shoppers are preferring food, which has smaller margins, over discretionary items (such as clothing and electronics) which have higher margins. This has increased inventory costs and forced Walmart to mark down products to move them out of the store. The company doesn't mention it, but Walmart isn't necessarily the cheapest store on the block, with rivals Aldi and Lidl capturing increasing market share because of inflation.

Now that's done with

Since Walmart already gave out the bad news, earnings can focus on what Walmart intends to do to recapture market share. Third quarter guidance might be a little better after the company's CEO Doug McMillon emphasized previously that the company would focus on prices to get customers to return in an inflationary environment.

The market is already pricing in around a 10% drop in earnings, with the consensus EPS forecast of $1.62, which is at the bottom end of the company's own guidance. Of course, analysts had last quarter's earnings wrong by a lot, but they might be overcorrecting this time. Sales are expected to increase to $151B, but given the dynamics caused by inflation, traders are likely to care much more about profit margins and market share.

WMT faces firm resistance

The price of Walmart stock has recently found resistance at the 38.2% Fibonacci retracement of the $161-$117 downward leg. Aside from the Fibonacci level, $134 has been the range low of the sideways market starting at $152 a year ago. And now, it has turned into resistance. Above the bearish retracement levels lies the range high of $152, and then the $161 top.

If bulls fail to break through the $134 level chances of reversing down to $117 will increase. Bulls have regained strength above the 50-day average of $125, but the stochastic divergence is indicative of a potential drop.

Key takeaways

Walmart cut its Q2 guidance in July due to a shift in shopping patterns amidst high inflation. However, the company expects Q3 guidance to be better. Analysts are not convinced because the last quarter's numbers were wrong. So, the focus is likely to be on how the firm can recapture market share and increase their profits margins while cheaper rivals are already a step ahead.