By Siddharth Cavale and Aishwarya Venugopal
(Reuters) – Walmart Inc raised its annual sales and profit targets on Thursday as the retail behemoth drew from price-conscious shoppers trading down to cheaper meat products and store brands, easing worries of consumer spending softening due to inflation.
Shares of the top U.S. retailer rose about 1.3% in pre-market trading on Thursday after it also reported better-than-expected results for the first quarter.
Walmart has been keeping grocery prices low to fend off competition from Target Corp and Kroger even as the industry struggles with higher costs, especially for labor.
As a result, sales at Walmart’s U.S. stores open at least a year rose 7.4%, excluding fuel, in the first quarter ended April 30, beating expectations of a 5.25% increase.
“We see a continuation of trade down certainly as consumers focus on maybe lower price proteins or lower pack sizes, but we also see private brand penetration continue to do really well for us in the quarter,” CFO John David Rainey told Reuters.
Rainey added that Walmart also saw higher demand for health and wellness products.
Comparable grocery sales grew in the low double-digits in the quarter in the United States, driven by strong demand for food and increased purchases from wealthier households, the company said.
This shift to groceries and health and wellness products –which tend to be less profitable than general merchandise such as apparel, home goods and electronics — hit gross margins, which fell 18 basis points in the quarter, Rainey said.
Still, Walmart’s strong results are in stark contrast to smaller rival Target’s bleak second-quarter forecast, which it blamed on weak consumer demand. Walmart forecast second-quarter results above expectations.
“Walmart clearly saw the benefit of food and fuel sales, helping to offset the pull back in discretionary spending,” Art Hogan, chief market strategist at B Riley Wealth said.
“The discounter sits in a good position in an environment where consumers are pulling back, or looking for lower priced options.”
Walmart now expects full-year earnings per share in the range of $6.10 to $6.20 compared to the prior outlook of $5.90 to $6.05. Analysts on average were estimating a profit of $6.16 per share, according to Refinitiv data.
The company also forecast net sales to rise about 3.5%, higher than its prior outlook of 2.5% to 3%.
Operating income rose 17.3% in the first quarter, in part due to higher contributions from its advertising, delivery and fulfillment services businesses. Walmart’s adjusted earnings per share came in at a better-than-expected $1.47 per share.
Net revenue rose 7.6% to $152.30 billion in the first quarter, beating estimates of $148.76 billion.
(Reporting by Aishwarya Venugopal in Bengaluru and Siddharth Cavale in New York; Editing by Arun Koyyur and Chizu Nomiyama)