Jefferies Retail Analyst Steph Wissink joins Yahoo Finance Live to discuss Yahoo Finance Live to discuss quarterly earnings for Walmart, inflation, excess inventory, consumer spending, and the outlook for retail growth.

Video Transcript

JULIE HYMAN: We've been talking all morning about Walmart's forecast cut-- cutting guidance for the second quarter and for the full year as well-- sent the shares tumbling. They're now down by about 8%, and they've been weighing heavily on the Dow, on the retail sector overall, on online retailers as well. There's quite a ripple effect.

Joining us now with over 20 years of equity research experience, Jefferies retail analyst, Stephanie Wissink-- Steph, it's good to see you. Why did Walmart wait? This is the question that we've been talking about a little bit this morning. Target came out a couple of times, kind of reset expectations.

And the obvious question was, isn't the same thing happening at Walmart? And yet, Walmart felt a little slow here to adjust expectations. Do you think that's the case? And if so, why?

STEPHANIE WISSINK: Yeah, I think it's a reflection right now of just the contradictory data points that we're seeing out there. There isn't clarity in any step of the business right now. So I think part of it is waiting to have some degree of sensibility around just how deep the cut needed to be, and then recasting the back-half expectations.

I think for Walmart, to recall, they have a new CFO coming in. So the timing of that, I think, is also something to consider in the timing of the pre-release.

BRIAN SOZZI: Stephanie, I think a lot of folks-- and I'll count myself among them-- think in times of economic stress, people trade down to Walmart. But that's not what this quarter or this preannouncement says, right?

STEPHANIE WISSINK: Yeah, I think you have to separate the headline from what lives beneath it. So at the headline level, that is true that we are seeing particularly share gains in grocery. And from Walmart in particular, that's important, because grocery is the lead category that drives customer acquisition.

So we think we are seeing evidence of that in the topline figures. But it's what lies below it that was actually very surprising to me. And I don't know if you all felt the same, but this pre-release to me really humanized what's happening inside the household, in terms of decision-making.

When we see consumers compromising wants to fund their needs because of inflation, that's a real human response. And that is what struck me about digging beneath the headline-- is that there's this pivot happening from discretionary and general merchandise into necessities, and the household is having to make discriminate decisions every single week about funding that inflation. So less of those wants categories and more of those needs categories-- and then, overall, you're taking share of particularly within the grocery category.

BRAD SMITH: And perhaps-- what about how much they're actually buying when they do make that purchase? Because Sam's Club, even within Walmart, is one area that if consumers are seeing pressure for themselves, they might start to lean towards buying in bulk. Is there anything to suggest that this is going to permeate across even the bulk-buying categories in this broader retail industry?

STEPHANIE WISSINK: You know, we're seeing in the Club channel that the traffic has been remarkably resilient. And just as a side note, on Club, one of the strongest customer acquisition tools for them is gasoline. And when gas prices spike, that tends to be a net beneficiary to traffic to their pumps.

So broadly, we would say Club is still an outlier to the positive. Bulk-buying can actually be a way to save. And I think even broader, on the gasoline side, it's an area where you can almost value-hack. Regardless of what your consumer income profile looks like, we know that even the high income loves to find a way to value hack the system, and gas tends to be the way that the Club channel does that.

JULIE HYMAN: You know, when I think about Walmart in this situation, I'm reminded of that ship that got stuck in the Suez Canal, right? You're talking about an enormous, enormous operation that now has to pivot and turn, and turn, and turn, and turn until it gets out of this. With a company of this size, how long is it going to take to make these necessary adjustments?

STEPHANIE WISSINK: Yeah, I think it's an excellent question. I mean, the supply chain is still not seamlessly smooth. So we do know that there's digestion happening, in terms of excess inventory and the timing of that inventory. But the only way to remediate that is to clear through and use discounts to do so.

So I think our back-half expectations now assume some incremental discounting to clear through that inventory, but also order cuts. And we know that that's happening as well. So you need to kind of turn off the faucet into the bathtub, and open up the valve at the bottom to release more of the water in order to recalibrate to consumer demand.

So we know that that's happening. But you're absolutely right. This is a big organization-- one of the biggest buyers of consumer goods in the world, and certainly in the US. And that is going to factor into how long it takes to digest through.

One of the things that they shared, which I thought was really interesting, is even despite deep discounts on some of these general merchandise categories, the consumer is reticent to buy. So that might also be a signal of just how promotional the holiday period is going to have to be in order to convince consumers that it's worth the purchase, even at a discount, but also maybe even compromising some of those needs for a little bit to buy into the wants. So it's taking a lot more to shift the consumer as well.

BRIAN SOZZI: Stephanie, what are the aftershocks to this warning for some of the companies that you, in fact, cover, like a Mattel like a Hasbro-- so the toy makers-- even the makeup companies. Now, are they suddenly at risk of coming out warnings of their own?

STEPHANIE WISSINK: Yeah, I think there's a really good exercise now to go through and look at general merchandise exposure to the mass channel, broadly. Clearly, we see Walmart being more grocery index, so their exposure to general merchandise is much smaller than other companies like a Target. But we're having to go through and really stress-test our models one more time around order cuts.

And I remember this in 2000 and 2008, where the cuts weren't big enough the first time. And we had to go back and do remedial cuts again, and there were downstream cuts that happened. So any time we hear a company of this size cutting orders, we have to go through and look at the big suppliers, and that would include the toy companies, electronics, soft home, hard home.

Clearly, apparel is an area where they're seeing some weakness. So I think broadly, we're taking a closer look at general merchandise estimates for the back half of the year, and even into '23 at this point. I think it's smart now to start to look at this as the first stage of what might be a multi-quarter phase of reduction in inventory.

BRAD SMITH: Steph, thanks so much for joining us here today. Always a pleasure to get your perspective and insight on all of these retail market players, but especially Walmart here on the day, on this massive news from the company. That is Steph Wissink, who is the Jefferies senior research analyst. Thanks so much.