Omicron's 4Q Impact On Walmart Was $450 Million Higher Than Expected

Employee leave costs were $450 million higher than Walmart had anticipated in the fourth quarter of 2021. 

That is emblematic of the impact omicron had across the economy and helps explain why employers became more emphatic about prudent health initiatives. JL 

Christine Grace reports in Winsight:

Associate-leave costs increased more than $450 million as the omicron variant of COVID-19 spread rapidly across the country, resulting not only in spikes in new cases but also fresh waves of school and childcare closures. Supply-chain costs were (also) more than $400 million higher than expected in the fourth quarter. Late last week, Walmart announced that fully vaccinated associates are no longer required to wear face masks on the job, except where required by law.

Omicron and supply-chain challenges landed dual punches in Walmart's fourth fiscal quarter of 2022, which ended Jan. 28, company leaders said Feb. 17.

In an earnings call with investors, Walmart CFO Brett Biggs—who will depart the company early next year—said supply-chain costs were more than $400 million higher than expected in the fourth quarter. Associate-leave costs increased more than $450 million as the omicron variant of COVID-19 spread rapidly across the country, resulting not only in spikes in new cases but also fresh waves of school and childcare closures.  

As fiscal year 2023 gets going, "We're still challenged with increased costs related to COVID and supply chain," Biggs said. But Walmart expects those to ease at least somewhat over the course of the year, and it set its sights on consolidated net sales growth of around 3% in constant currency for the full fiscal year.

The company expects to see earnings per share growth in the mid-single digits and Walmart U.S. comp sales to climb just north of 3% for fiscal 2023, with that comp growth weighted toward the back half of the year. In the first fiscal quarter, Walmart anticipates comp growth of 1% to 2% as the company laps the impact of the final COVID-19 economic stimulus payments to hit consumers' wallets. 

In the just-wrapped fourth quarter of fiscal 2022, Walmart reported U.S. comp sales growth of 5.6% (excluding fuel), in line with analysts' estimates. Grocery gained share again for the business, driven by strength in the pet, beauty and baby products categories.

Walmart's fiscal 2023 full-year guidance assumes not just an improvement in the COVID and supply-chain picture but also a "generally favorable economic position" for U.S. consumers throughout the year. As the country speeds toward the two-year anniversary of the first COVID-prompted shutdowns, Americans may not be feeling great about the economic landscape, but wages are rising (and at a pace faster than inflation for some, though not all, workers); it remains largely a job-seeker's market; and continued declines in new COVID-19 cases and the related easing of pandemic mitigation measures may have things looking brighter for consumers as the year goes on. Late last week, Walmart announced that fully vaccinated associates are no longer required to wear face masks on the job, except where required by law.

"I'm as optimistic about the business as I've ever been," said Biggs. 

That optimism may contrast with consumers' on-the-ground sentiment at the moment as inflation stands at a 40-year high and consumers see grocery prices 7.4% higher, on average, than a year ago. But Walmart sees continued strength in its low-price leader positioning.

"Fighting inflation is in our DNA," Walmart Inc. President and CEO Doug McMillon said in the company's third-quarter earnings call in November, and he reiterated the message Feb. 17. In a time of rising inflation, "Everybody becomes more price-sensitive," McMillon said, "and that's to our advantage."

Smart mix management as well as the revenue generated by the Walmart Connect advertising platform help the company keep prices in check for budget-conscious customers, Walmart executives said. "We think about things like opening price points and protecting for a lower-income family some of the things they need from a staples point of view," McMillon said. And although most retailers are contending with higher costs while trying to hold the line on prices, given Walmart's long-standing supplier relationships, "We are likely a bit unique with the depth of experience that we have" in smoothing out, or spreading out, the impacts of inflation, McMillon said.

In addition, continued investment in automation—high-tech fulfillment centers, last-mile capabilities (including the scale-up of InHome delivery and even new technology for in-store associates—"creates an opportunity for more productivity over time, and that's helpful," McMillon said.