Share Prices & Company Research

News

23 May 2022

Market Round-Up

Walmart shares suffered their biggest drop since 1987’s Black Monday stock market crash last Tuesday, falling 11.4%. This came after the company reported a 25% quarterly earnings decline and cut its full-year profit outlook owing to higher wages, a jump in fuel costs and softness in general merchandise sales at its US businesses. The rapid pace of inflation in the US has had an unwelcome impact on the firm with the rate of inflation in the food sector massively undermining its general merchandise sales with customers cutting spending elsewhere as they priority necessities.

Despite three causes for the cut in earnings guidance, only one is expected to persist over the longer term. Higher staffing costs were a result of overstaffing during the Winter period when Covid-19 cases were once again on the rise. Employees that were out of work as a result of having the virus returned faster than anticipated, meaning they did not require as many workers as initially thought - Walmart expected these higher staffing costs to be isolated to the first quarter. Chief Executive Doug McMillion additionally reported that there had been a timing issue with fuel costs as they were too slow to pass higher costs through to customers, meaning fuel expenditure was US$160m higher in the US than the company had forecast. It expects to resolve this by the end of the first half of the year, however. With inflation at its highest level in 40 years and interest rates rising in response, the company expects subdued consumer demand to remain until at least the end of year, especially in the general merchandise sector. More customers are also switching to cheaper private-label items, particularly in groceries, and away from branded goods.

While Walmart experienced its biggest drop in 40 years and the US S&P 500 consumer staples sector declined 1%, the benchmark's consumer discretionary sector gained 2.7% with some clothing, travel and automaker shares gaining ground. Supply improvements meant that US retail sales rose strongly in April as consumers spent more on motor vehicles. This contrast between rising and falling sectors is attributable to the concept that soaring inflation has a more sizeable impact on lower-income customers who shop at value stores than consumers who are still able to buy pricier items from companies including Under Armour, up 4% and Ralph Lauren, up 3.8%. The Russia-Ukraine war triggered price increases in vital goods such as food and energy, leaving lower-income consumers experiencing a real income shock. This is heightened by the fact that the lower-end consumer will be much closer to having exhausted their pandemic savings.

Two of the UK’s largest pub groups, Mitchell’s & Butlers (M&B) and Marston’s, have warned that cost pressures are becoming an increasingly significant challenge to the industry in which pubs are being forced to cut discounts, reduce energy use, and limit menus. M&B is expecting costs for the full year to be up 11.5% compared with 2019 and, depending on the high volatility of energy prices, could be up a further 6% in 2023. The company is focusing its attention on cost mitigating procurement strategies along with cutting its energy use as costs related to utilities, wages and food are particularly concerning.

Marston’s, which operates 1,482 pubs, has begun to phase out its popular long standing ‘two for one’ food offer and has already taken action to minimise and simplify its menu. The hospitality industry has been one of the heaviest hit in terms of price increases due to its reliance on ingredients that have been severely impacted by the Russia-Ukraine war and high energy requirements. Some have said energy bills have increased by more than 300%. Many pubs have also faced severe staff shortages since the reopening of pubs following the lockdowns of the Covid-19 pandemic; many workers left the industry after almost two years of unstable shifts. Despite the woes of the price increases, both pub groups have managed to return to positive profits with M&B and Marston’s reporting pre-tax profits of £57m and £25.6m respectively after both suffered over £100m in losses in 2021.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Market Round-Up
SUBSCRIBE TO OUR PUBLICATIONS
We offer complimentary investment publications produced by our in-house Investment Research team. Please click here to view our range.