Walmart Inc. said Tuesday that it has canceled billions of dollars in orders as part of a continued effort to align inventory levels with projected demand and to reduce its exposure to certain products that have fallen out of favor with budget-conscious consumers.
The nation’s largest retailer (NYSE: WMT) said its U.S. division reported a 26% increase in fiscal second-quarter 2023 inventory levels compared with the same period in fiscal 2022. This was a 750-basis-point improvement over a nightmarish fiscal 2023 first quarter when Walmart got blindsided by a combination of rapidly rising costs and a mix of higher-end inventory that was passed over by consumers coping with rapidly rising inflation.
Walmart executives said the company has cleared out most of its summer seasonal inventory ahead of the back-to-school season — which has begun in large parts of the South — and the upcoming holiday period. Executives said the company is making progress right-sizing its inventories, but that it will take at least a couple more quarters to wring the imbalances out of its network.
Walmart’s seasonally adjusted days to turn inventory declined to 44 days in the second quarter from 46 in the prior quarter, according to data from Michigan State University. That signals that sales are starting to outpace order arrivals, according to Jason Miller, associate professor of logistics at the university’s Eli Broad College of Business.
Walmart’s gross margins took a hit as a result of its actions, said Miller. He said, however, that the gross margin drop was not as severe as at rival Target Corp. (NYSE: TGT). Target, which faces the same inventory challenges as Walmart, has also been reducing inventories as quickly as possible.
Walmart’s seasonally adjusted product arrivals, not adjusted for inflation, increased by just 0.1% in the second quarter from the first, said Miller. At the same time, seasonally adjusted sales, again not adjusted for inflation, rose 4.1% over the same period, Miller said. “This is why inventories were drawn down,” Miller said in an e-mail.
Most of Walmart’s inventory inflation occurred in the fourth quarter, when arrivals far outpaced sales, Miller said.
Walmart’s comments came as it reported fiscal second-quarter results that were more palatable than the fiscal first-quarter disaster. Adjusted earnings per share of $1.77 was well ahead of the $1.60-per-share consensus. Revenue of $152.9 billion was an 8.4% year-over-year increase adjusted for currency fluctuations. Operating income of $6.9 billion was 6.8% below the same period a year ago.
For the fiscal third quarter, Walmart projected a 5% year-on-year increase in net sales. It also projected an 8% to 10% year-on-year decline in operating income and a 9% to 11% drop in adjusted earnings per share.
Shares rose more than 5% on the trading day to close at $139.37 a share.