Walmart issues worse-than-expected outlook as high gas prices hit shoppers, shares drop 7%

Walmart issued a worse-than-expected financial outlook on Thursday as it reported fiscal first-quarter results, raising questions about the health of the U.S. consumer as high gas prices strain shopper budgets.

The mega retailer stood by its fiscal 2027 outlook, which disappointed investors last quarter when it was issued. The retailer said it's expecting adjusted earnings per share to be between $2.75 and $2.85, lower than expectations of $2.91, according to LSEG.

Walmart said it anticipates net sales will rise between 3.5% and 4.5% for the year.

The retailer also issued its outlook for its current quarter, which came in light of expectations, as well. It expects adjusted earnings per share will be between 72 cents and 74 cents, missing expectations of 75 cents. Walmart anticipates net sales will climb 4% to 5% for the quarter.

The retailer's shares dropped about 8% in morning trading.

Walmart's weaker-than-expected outlook comes as the largest U.S. retailer and its peers post relatively strong sales for the first quarter. The company's revenue rose 7% in the first quarter, beating estimates, and same-store sales climbed 4.1%, in line with expectations, as the value player continues to see gains in its e-commerce business and with higher-income shoppers.

So far this earnings season, other major companies have also said consumer spending has held up in the face of higher gas prices and growing worries about the state of the economy. But that resilience also came amid higher tax returns, which Target said on Wednesday may have fueled some of the growth it saw during the first quarter.

In an interview with CNBC, Walmart finance chief John David Rainey also said consumers may feel more strain as the effect of tax returns goes away in the second quarter.

"I think higher tax returns muted some of the pressure related to higher fuel prices and as we're in a period of time right now where those tax refunds are largely not coming in, I think consumers are going to feel more of that pressure from higher fuel prices," said Rainey. "It's something that we're keeping a close eye on, but that expectation is built into our guidance for the second quarter."

He said that Walmart's fiscal second-quarter guidance for operating income is the best the retailer's given in maybe a decade and a half, and came as the company saw a $175 million headwind from higher fuel prices.

"It'll probably be larger than that in the second quarter if fuel prices stay where they are, so we're absorbing those prices and still maintaining our guidance, and I feel really good about that," said Rainey.

On a call with analysts Thursday, Rainey made clear the company is still performing well despite macroeconomic pressures.

"While there are certainly pressures on the consumer, let me reiterate: our business is strong," said Rainey. "We are executing on the important strategic initiatives that are critical to our future sales and earnings growth. Our delivery speed and capabilities continue to get faster and reach more customers and members, and our value proposition of low prices with convenience continues to resonate with customers, and is the primary reason new customers shop with us."

During Walmart's fiscal first quarter, the retailer beat on the top line but issued in line results on the bottom. It was just the third time in 16 quarters that Walmart did not beat quarterly earnings expectations.

Here's how America's largest retailer performed during the quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

The company's reported net income for the three-month period that ended April 30 was $5.33 billion, or 67 cents per share, compared with $4.49 billion, or 56 cents per share, a year earlier. Excluding one-time items related to business reorganization charges and other nonrecurring items, Walmart posted adjusted earnings per share of 66 cents.

Revenue rose to $177.8 billion, up 7% from $163.98 billion a year earlier.

Walmart's results and annual outlook come as questions swirl about how higher prices are impacting customer wallets.

In the three months since Walmart last reported earnings, there's a new conflict in the Middle East, gas prices have soared and consumer sentiment has plummeted, falling to a fresh record low in May. The flurry of bad news comes on top of years of sticky inflation, higher interest rates and a global trade war that's pushed prices even higher.

Walmart is among the best positioned to weather just about any economic storm. Long a value play among lower-income shoppers, Walmart in recent years has been winning over more high-income consumers, which has helped fuel its growth and insulate it from economic shocks that have hit lower earners more acutely.

Rainey said the so-called K-shaped economy is seen in Walmart's results, and the company closely monitors how spending between high-income, medium-income and low-income consumers is shifting.

"That gap has continued to widen as we've gone through the last couple quarters between the high-income and the low-income," said Rainey.

He said the average number of gallons that a customer fills up with when they come to the company's fuel stations fell below 10 for the first time since 2022, which he said is an "indication of stress."

"The high-income customer is spending with confidence into many categories, while the lower-income consumer is more budget conscious and perhaps navigating financial distress," he said.

The impact consumer pressures are having on Walmart's business are twofold. Its cautious second-quarter guidance speaks to the concerns around consumer confidence, but it's also taking more market share as inflation-weary shoppers hunt for value.

During the quarter, it saw its strongest transaction growth in six quarters and the best share growth it has seen in fashion in five years. Rainey said higher tax refunds likely provided a lift in general merchandise categories, but he said the company is also executing well and winning over more shoppers.

Meanwhile, Walmart's alternative revenue streams also performed well during the quarter. Global e-commerce sales, a key growth area for the company, climbed 26%, while sales on its U.S. marketplace grew almost 50% during the period. Walmart's global advertising business jumped 37%.

All of these high-margin revenue streams can help Walmart keep prices low in the face of rising costs.