• by Sarah Mahoney  @mahoney_sarah, May 17, 2022

Sales are still rising at Walmart due to increasing prices and resilient consumers. But its profits sank well short of expectations, sending worrisome signals that rising inflation rates will squeeze earnings throughout the retail sector.

Total revenue for the Bentonville, Arkansas company rose 2.6% to $141.6 billion on a constant currency basis.

The retailer says comparable sales in the U.S. rose 3% in the first quarter compared to the year ago results. And they climbed 9% when compared to two years ago. Ecommerce notched a gain of just 1% this quarter, and 38% from two years ago.

But, hurt by rising expenses, Walmart’s operating income dropped 22.7% to $5.3 billion, compared with $6.9 billion in the year-ago period.

Its global advertising business grew 30%.

The retailer says it continued to make market share gains in the grocery sector. But it also experienced a notable softness in discretionary categories.

Walmart chalked that up to rough comparisons, since consumers were buoyed last year by stimulus payments. And it says cooler weather cut into apparel, patio furniture and landscaping sales.

But observers are concerned these numbers might signal a pullback in consumer spending.

"Walmart's softer-than-expected earnings for the first quarter demonstrate that no retailer is immune from the higher cost pressures reverberating throughout the retail sector," writes Mickey Chadha, retail analyst at Moody's, in his note on the results.

The jump in the company’s expenses shows that it's getting harder for stores to pass higher prices through to consumers while grappling with higher wage and labor costs.

"Consumers are increasingly drawn to the lower price points that Walmart can offer for groceries, and Walmart is taking market share in food, but higher food sales are also putting pressure on gross margin," said Chadha.

He thinks that, despite lower earnings guidance for the year, "Walmart is one of the best-suited retailers to weather the challenging period for the sector."

Moody's is less optimistic about other stores, and cut its outlook for the retail sector from stable to negative.

"Retailers face deteriorating business conditions as they grapple with shipping delays, product shortages and inflation," writes Christina Boni, senior vice president, Moody's Investors Service. "We expect sales to increase 2%-4% while operating profit is set to decline 1%-3% over the next 12-18 months."