Arriana McLymore & Siddharth Cavale

NEW YORK (Reuters) – When Walmart reports on Thursday its holiday quarter results, investors will also be interested in how increased labor, transport, and materials might impact the retailer’s margins given the “Everyday Low Price” strategy.

Refinitiv expects total gross margins of 23.90% to occur in the fourth quarter. That’s down from 25.26% during the preceding quarter. Meanwhile, revenue will fall 0.6% and reach $151.15 billion.

John Furner, Walmart U.S. CEO stated on a November conference call with analysts that Walmart will be the “last” major retailer in America to increase prices for its merchandise due to its relationship with suppliers.

“We have so many suppliers that we can choose from…that are able to do everything” to maintain low prices despite the inflation. “As the months progress, we expect to find more” suppliers willing to roll back prices, he said at the time.​

However, some investors were unsure if Walmart’s suppliers would accept low prices. Walmart’s gross margins fell in both the past two quarters. They were especially weak in the United States the prior quarter. This was the first drop since the outbreak of the pandemic. In a note, Davidson analysts stated.

Josh Smith, Capital Wealth Planning LLC’s lead portfolio manager, stated that “in an inflationary climate, we believe that…there is going to be significant margin pinch Walmart.”

Smith owned Walmart since 2020. His fund, however, sold it in February. He said, “For stocks trading at over 40x earnings and for companies that are not growing at 15% per annum… it’s expensive and we think there are better options right now.”

Doug McMillon was previously the Walmart CEO. He described the 4700-store chain in America as an “inflation fighter”. It offers bargains for shoppers, without them having to wait on sales or promotions.

Supply chains were further constrained by the Omicron variant’s spread in the United States last year, which led to increased costs and a tighter supply chain.

Inflation in the United States rose 7.5% over the past year in January. This is the highest annual rise in 40 years. The Adobe (NASDAQ) Digital Price Index reported that prices for grocery items rose by 5.8% in January across all U.S. online retailers. It was a record-breaking increase.

Walmart’s advertising revenues could help offset the impact on its gross margins. Through Walmart Connect launched in January 2021, Walmart offers digital advertising space to major advertisers and consumer products companies. Keybanc analysts project that Connect will generate over $3B in pretax earnings each year, helping Walmart to offset rising costs.

Analysts also monitor any potential impact on Walmart Plus, the subscription grocery-delivery service available to customers who pay $12.95 per monthly. Amazon.com (NASDAQ) recently raised its Prime subscription fee from $12.99 to $14.99.

Walmart shares fell 8% from mid-February to the end of 2017. Comparatively, Costco’s (NASDAQ:), shares are down 11% and Dollar General (NYSE;) shares are down 15 Target (NYSE:) TGT.N> shares are down 10%.

Summit Global Investments’ chief investment officer Dave Harden said that when volatility is present, the stock market “performs well.”

Huntington Private Bank director of Equity Research Randy Hare stated that, if there is a recession in the economy, it will be “the type of environment we really like Walmart.” Hare’s company owns more Walmart shares than $40 Million.

According to him, when the economy slows down shoppers will be more price-conscious and are more inclined to shop at Walmart for bargains.

Walmart’s margin performance vs industry peers – https://fingfx.thomsonreuters.com/gfx/mkt/akpeznwqmvr/Walmart%20margins.PNG