Walmart profits warning triggers UK retail sector sell-off

Many retailers had done well over the past month or two, but this shocker from the world’s biggest retailer has sent shockwaves through the industry. Here are some of the casualties in the UK.

A revival for retail stocks stalled in dramatic fashion today as Walmart and Wickes (LSE:WIX) revealed the impact of food and fuel inflation on clothing and home improvement spending.

Shares in B&Q owner Kingfisher (LSE:KGF), Marks & Spencer (LSE:MKS) and electricals chain Currys (LSE:CURY) were among those sharply lower after last night’s profits warning by US retail giant Walmart (NYSE:WMT) and a cautious trading update from Wickes.

The falls unwound last week’s retail recovery, when encouraging updates from the likes of Dunelm (LSE:DNLM), JD Sports Fashion (LSE:JD.) and Sports Direct owner Frasers Group (LSE:FRAS) boosted hopes that this year’s bout of heavy selling has been overdone.

The reality check from Walmart, which operates 10,500 stores in 24 countries, came as it said food inflation in double digits had affected its customers’ ability to spend on general merchandise categories.

With markdowns needed to shift stock, it lowered its margin expectations for the rest of this year and reduced Wall Street estimates on annual profits. The company’s unscheduled update caused its shares to fall almost 10% in extended hours trading and weighed on supermarket peers Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY)’s in the London market.

The worry for investors is that there’s more pain to come for households, given that interest rates in the UK and US are heading higher and there’s no end in sight to energy inflation.

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These fears led to some profit-taking at JD Sports Fashion after its 30% rise over the past month, leaving shares down 6.4p at 132.5p. Corporate merchandise firm 4imprint (LSE:FOUR), whose shares jumped 20% last week after it highlighted stronger-than-expected demand from US businesses, reversed 140p to 3,060p in the FTSE 250 index.

The biggest falls of the session were in the home improvement sector after Wickes reported softer trading in DIY categories in recent weeks and said that customers are taking a little longer to consider “big ticket” purchases in the do-it-for-me sector.

Given the more uncertain macroeconomic backdrop, it lowered its full-year profits guidance to 17% below the City’s most optimistic forecast to a range of £72 million and £82 million.

This was despite a robust second quarter update showing a 5.4% increase in like-for-like sales for growth of 26% over the same pre-pandemic period in 2019.

Having already fallen by around 29% this year, Wickes shares tumbled another 32.9p to their lowest level since being created in a demerger from Travis Perkins in April 2021. Shares in Travis Perkins (LSE:TPK) and Howden Joinery (LSE:HWDN)also fell heavily today.

Liberum analysts cut their Wickes price target from 425p to 360p, which compares with the All-Share stock’s 135.6p today. They said the profits downgrade needed to be set against a robust first half performance and what would still be a “commendable” full year outturn in the current environment if the new guidance is hit.

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Looking beyond the short term, Liberum pointed out that Wickes continues to maintain its market-leading position in the UK’s £25 billion repair, maintenance and improvement market.

The broker added that the current valuation failed to reflect the longer-term growth opportunity, strong cash generation and healthy balance sheet.

One bright spot today came from AIM-listed Shoe Zone (LSE:SHOE), whose position in the budget sector continues to pay off after a second profits upgrade in a month.

The shares are now back where they were before the pandemic hit, adding another 7.5p to 192.5p after revealing that profits for the year to the start of October will be not less than £9.5 million. It follows an uplift to £8.5 million at the end of June.

Shoe Zone, which operates 368 stores and employs 2,700 staff, reported higher-than-expected demand for summer products, particularly in the last two weeks. Good supply chain and cost management has also led to improved margins.

On 17 August, Shoe Zone is to hand shareholders 2.5p a share after an earlier-than-expected return of dividend payments was announced with May’s interim results.