Dive Brief:

• Difficulty unloading apparel inventory is forcing higher markdowns at Walmart, leading the retail giant to lower its operating profit estimates, which in May were expected to be flat or up slightly in Q2 and the full year. Now Walmart expects operating income to fall 13% to 14% for the second quarter and 11% to 13% for the year.

• Other estimates were raised, however. Net sales in Q2 should grow 7.5%, up from May’s expectation for a more than 5% rise, with full year growth to reach about 4.5%, slightly above the previous expectation for 4%, according to a company press release.

• Q2 comp sales for Walmart U.S., excluding fuel, are expected to reach about 6%, up from the previous 4% to 5% estimate, and reach about 3% in the back half of the year. In May Walmart said that full year comps at Walmart U.S. would reach about 3.5%.

Dive Insight:

Walmart on Monday evening described a situation that has grown increasingly obvious in the last few months — consumers’ money is going to essentials, leaving little to spare for discretionary items like clothes.

“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” Walmart CEO Doug McMillon said in a statement.

General merchandise sales will be squeezed further in the back half of the year, although a strong start in back-to-school sales at Walmart U.S. is encouraging, he also said.

Inflation on consumable items has risen in the low double-digits year over year and nearly 20% since 2019, so consumers are indeed having to make tough choices, Wells Fargo analysts led by Edward Kelly said Monday. But Walmart is less exposed to the downsides of that because of its dominance in grocery, several analysts said.

The inventory glut that Walmart is clearing out now is similar to the situation at Target, which last month also drastically lowered its profit and margin expectations and said it was taking drastic steps to pare down its inventory.

“Supply chain snafus and miscalculations around demand,” in addition to changing consumer behavior, contributed to Walmart’s troubles, according to a research note from GlobalData Managing Director Neil Saunders. The retailer also misjudged how much last year’s pandemic-related government support lifted the consumer and buoyed sales, UBS analysts led by Michael Lasser said in emailed comments.

Analysts by and large expect Walmart to right the ship in the coming weeks, with UBS noting that the retailer is making progress clearing inventory. “This should put it in a better position for the holidays and beyond,” those analysts said.

The markdowns have some value to Walmart, even if they cut into profits, Saunders said. The higher sales estimate “reflects the fact that inflation has driven more customers to Walmart, especially for food, enticed by the company’s commitment to everyday low prices,” he said, noting, however, that the category also carries thinner margins.

“The main priority for the company is to retain its price leadership credentials and not allow value players like Aldi or the dollar stores undermine its capability to attract shoppers looking for keen prices,” he said. “If that means incurring short term pain, we believe that to be better than the alternative of eroding its longer-term brand values.”