Walmart's profit warning shows inflation is still a big problem. Here's our take - CNBC

Walmart (WMT) cut both its second-quarter and full-year profit guidance after the closing bell Monday, sending shares tumbling nearly 10% in extended trading and dragging down shares of other retailers, too. Walmart is due to report second-quarter results on Aug. 16. Bottom line Our primary takeaway from Walmart's pre-announcement — its second outlook adjustment since reporting fourth quarter results in February — is that retail operators who struggled with inflation last quarter and had the wrong inventory due to changes in consumer spending habits are still struggling. One would have thought that a Walmart guidance cut was already priced into the stock after rival retailer Target (TGT) said in early June it was marking down excess inventory and taking a hit to profits to do so. Moreover, we already knew that Club holding Walmart had discounted a significant amount of inventory. However, Monday's after-hours reaction to the Walmart news shows you that new bad news is still bad news for big box retail. On the other hand, we think Club holding Costco (COST) is navigating these challenges much better than Walmart and Target based on the members-only warehouse giant's monthly sales data and a recent CNBC interview with CEO Craig Jelinek . The news According to its press release late Monday, Walmart now expects adjusted earnings per share to decline between 8% and 9% in the second quarter and between 11% and 13% for fiscal 2023. Walmart's prior second-quarter EPS guidance was "flat to up slightly," while it previously expected full-year EPS to decline by about 1%. That prior guidance was issued in May, when Walmart reported disappointing first quarter earnings and also revised lower the earnings guidance it had offered to investors in February. Here's the timeline: As we wrote in February , after its better-than-expected fourth quarter, Walmart's full-year guidance signaled bumps ahead. Then in May , after that terrible first quarter, Walmart disappointed shareholders when it lowered its full-year profit forecast, crushing the stock that day. The primary issue for Walmart is a changing sales mix. Inflation is pinching consumers, forcing them to allocate more income to necessities such as food and fuel, leaving less available for higher margin discretionary purchases. That dynamic is being compounded by Walmart's wrong-for-the-moment inventory, which has prompted the retailer to markdown items to get them off the racks and shelves. The change in mix is how Walmart on Monday could actually revise higher its consolidated net sales growth for both Q2 and fiscal 2023 — but at the same time slash its earnings outlook. Put another way, the overall dollar value of what Walmart is selling is going up, but it is selling less profitable items. Walmart's new consolidated net sales guidance is for 7.5% growth in Q2 and 4.5% growth fiscal 2023. Previously, the Arkansas-based retailer called for over 5% and roughly 4% growth, respectively. The one silver lining of the preannouncement is that it could speak to the fact that the Federal Reserve is winning its war on inflation. While the aggressive markdowns may not be good for Walmart, it is good for the consumer and speaks to prices possibly coming down after a period of inflation the likes of which we haven't seen in roughly 40 years. Given that inflation is the primary concern on investors' minds, the news is not good for Walmart but possibly a positive for the broader economy. Only time will tell but we will get two key updates this week on the macroeconomic front in the form of the Fed meeting on Wednesday and the advanced second-quarter GDP release on Thursday. — We'll provide additional analysis in Jim Cramer's "Morning Thoughts" dispatch and during Tuesday's "Morning Meeting" livestream for Club members. (Jim Cramer's Charitable Trust is long WMT and COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Vehicles in a parking lot at a Walmart store in Torrance, California, US, on Sunday, May 15, 2022.

Bing Guan | Bloomberg | Getty Images

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Walmart's profit warning shows inflation is still a big problem. Here's our take - CNBC

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Walmart's profit warning shows inflation is still a big problem. Here's our take - CNBC

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