Walmart store in Washington, DC on July 15, 2020.
The retail giant just released expected earnings showing they're thriving, while consumers suffer.Andrew Caballero-Reynolds/AFP via Getty Images)
  • Walmart had a blowout Q3, raising its annual outlook for the third straight period. The stock market didn't like it.
  • That's because Walmart found a way to keep prices relatively low, while most other big companies prioritize profits.
  • The stock market is demonstrating that the margin matters more than worries about inflation, even amid a 30-year high.

Inflation is hitting everyone hard — even the profitable retail giant Walmart. 

A week after the CPI report showed inflation at its greatest year-over-year increase since 1990, Walmart released its earnings, and it had a blowout third quarter while offering a lesson on how to use "pricing power" — or not to.

The retail giant's sales on Tuesday toppled analyst expectations — and so did its projections for future sales. Maybe it doesn't sound like a lot for Walmart to project full year earnings per share (on an adjusted basis) of $6.40 up from $6.20 to $6.35, but it's the third straight quarter that the retailer did so. It's having a very good 2021. That's not good enough for the stock market.

On Walmart's earnings call, CEO Doug McMillon said that "with an inflationary environment, there are things that come along with that and the company's cost inflation is higher than its retail inflation, meaning it is swallowing certain costs so customers don't have to pay quite as much. The company's consolidated gross profit rate — that is, its margin — was down slightly, by 42 basis points. 

Later on during the week, Target also reported higher profits than expected, but also reported absorbing higher costs to keep prices down for consumers. Its stock took a hit, with its shares falling as much as 5% because it bucked the higher-profit-margin trend.  

Walmart and Target are outliers among the S&P 500, which according to FactSet data, is tracking to record a net profit margin of 12.9%, compared to a five-year average of 10.9%. The only thing that's below is the record high of 13.1% — and that just happened in the second quarter, as inflation gathered steam. It is increasingly clear that inflation is at least partially the result of corporations padding their profit margins, more than, say, the result of too much pandemic stimulus.

Walmart declined to comment for this story.

Retailers across the country are raising prices to profit during record-high inflation

A little inflation is expected, and in fact healthy, most economists agree. But right now, inflation is at a 30-year high, and retailers across the country are raising prices to deal with it. 

"[Inflation] means your paycheck is not going as far as it once did unless your wages are increasing at the same pace, which has not been the case for most individuals," Steven Saunders, director and portfolio advisor at Round Table Wealth Management, told CNBC in June. 

That means that $15 probably won't get you the Amazon deal now that it would have last winter. That's proving to be an issue for a lot of companies, but not Walmart. 

Walmart is benefitting from shoppers being unable to spend anywhere else. One way they've accomplished this is by negotiating with their suppliers to keep their prices low.

"We're out there asking suppliers even now, 'Do any of you want to get aggressive and swim upstream and take prices down — while prices are going up — to gain share?'" John Furner, the head of Walmart's U.S. business, said on the company's third-quarter earnings call Tuesday. 

Furner also mentioned that the company chartered its own vessels to transport goods, ordered products to the U.S. ahead of time, and re-routed deliveries to avoid supply chain disruptions. 

These tactics seem to work. Across the board, Walmart saw improvements. The company's total revenue grew by about 4% to $140.53 billion from $134.7 billion last year, beating Wall Street expectations by about $5 billion. 

Excluding fuel, Walmart's sales increased by about 9.2% in the U.S. A StreetAccount survey predicted that the company would only improve by about 6.9%. 

Walmart's e-commerce sales in the U.S. increased 8% versus the same time frame from last year. 

Even if the stock market disapproves of Walmart's strategy, the company sees an American shopper set to keep shrugging off inflation. Walmart US President John Furner said that in the US, "we certainly see a consumer that has a strong balance sheet. We see spending levels higher, we see demand is higher."

Other companies see it too, and as they've been saying for months now, they're probably just going to keep raising prices.

Read the original article on Business Insider