Walmart is stuck with $59.9 billion in inventory. Should you buy the stock now?

Three months ago, walmart (WMT -1.47%) shareholders were led to believe that the company would be able to reduce its then-high inventory levels, even if it came at some cost.

Specifically, CEO Doug McMillon explained on the May quarterly earnings call that the chain of stores intends to “work on most or all of the excess inventory over the next two quarters,” but also warned that “we expect some gross margin pressure in the second quarter.” And the investors did get a slight taste of those markdowns for the recently ended quarter, but only a slight one.

Well, if you think the world’s largest retailer has gotten rid of as much inventory as it would have liked, think again. Inventory levels are still uncomfortably high, especially now as we head into cooler weather and the holiday shopping season.

Still sitting on loads of inventory

One of the most important yet underappreciated aspects of retail is having the right merchandise in the right place, at the right time, and at the right price. Profit margins are typically slim in this industry (Walmart’s net profit margins were just 3.4% of sales last quarter), so even the slightest misstep on the merchandise front can have a significant impact on the bottom line.

To its credit, Walmart boldly purchased new inventory late last year and early this year, responding to what it believed to be high demand in the wake of the pandemic. To his credit too, in the middle of this year he was ready to cut back on goods he knew he would struggle to sell at full price, believing it was better to grab a few pieces early than let the goods age. on store shelves.

However, there is still a lot to do in this inventory.

The table below tells the story. At the end of July, Walmart still had $59.9 billion in merchandise. This represents 39.2% of sales for the last quarter. Both remain exceptionally, historically high, albeit a little lower than the previous quarter’s levels.

Data source: Thomson Reuters. Table by author. All inventory and sales figures are in millions of dollars.

What if there was a time of year to not being stuck with excess inventory, that’s it.

The impact

In retail, timing is everything. Winter coats do not sell in April. Back-to-school items aren’t a draw in November. No one is looking for swimsuits in December. Merchandise that Walmart stores are now expected to load are fall gear like sweatshirts, tailgating items, rakes, Halloween costumes, and more. It’s not too early to think about the next season of holiday gifts either.

However, with cash still tied up in spring and summer merchandise, Walmart may not be willing or even able to fully commit to the current season’s most marketable merchandise. To that end, the $59.9 billion in merchandise the chain currently has in its stores is still very high for this time of year.

The risk of this dynamic is more markdowns of old inventory, missed sales due to a lack of good inventory, or a combination of both. The ultimate risk to this dynamic, however, is persistently weak profit margins. And we have already seen hints of this possibility. Gross margins for the last quarter fell to 24.2% of sales, continuing a steady downward trend that has been going on for a year now.

Walmart's gross margin rates have declined since mid-2021.

Data source: Thomson Reuters. Table by author.

We’ve seen Walmart’s gross margin rates decline in recent years, to be clear. These weaker numbers, however, came amid the pandemic in 2020 and a stumbling block at the end of 2021, when every company was grappling with the fallout of broken supply chains. The most recent episode of declining profitability reflects an increasing degree of discounting and markdowns.

Good stock, bad time

This is not the end of the world. Given its predicament, Walmart is holding up quite well. After all, it managed to beat last quarter’s earnings and revenue estimates.

Remember that Walmart lowered its own bar for the quarter less than a month ago, recalling earnings guidance released with the prior quarter’s results. Given its lack of progress on the inventory front last quarter, don’t be surprised if the company’s profitability is still under unseen pressure.

At the end of the line ? Walmart is an exceptional long-term investment, of course, and will overcome its inventory problems. The economy will also eventually recover. With a lack of clarity as to when these challenges might subside, however, any investor unable to weather the volatility that Walmart shares are sure to produce for the foreseeable future might want to stay away for the foreseeable future. instant.

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