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By Siddharth Cavale
(Reuters) - Walmart Inc struck a cautious note in its economic outlook for 2023 on Tuesday as the retail bellwether forecast full-year earnings below estimates and warned that tight spending by consumers could pressure profit margins.
Higher U.S. consumer prices and loftier costs for rental housing and food have raised fears among executives that the U.S. Federal Reserve could further lift borrowing costs to cool domestic demand, leading to an economic downturn in the second half of the year.
Walmart forecast earnings of $5.90 to $6.05 per share for the year through January 2024, below analysts' estimates of $6.50 per share, according to Refinitiv IBES data, as the company continues to battle price hikes from many of its product suppliers.
"There's still a lot of trepidation and uncertainty with the economic outlook. Balance sheets are continuing to get thinner, savings rate is roughly half of what it was at a pre-pandemic level and we've not been in a situation like this where the Fed is raising at the rate that it does," Chief Financial Officer John David Rainey told Reuters.
"So, that makes us cautious on the economic outlook because we simply don't know what we don't know."
Shares of the world's largest retailer rose 0.4%.
The forecast includes a 14-cent estimated impact from an accounting charge related to moderating inflation in key merchandise categories and reduced inventory levels at its Walmart U.S. and Sam's Club business, the company said.
Home Depot also forecast weaker-than-expected annual profits on Tuesday as soaring prices hit demand for home-improvement products.
On a post-earnings call, Walmart's Chief Executive Officer Doug McMillon said he expects "stubborn inflation" in dry grocery and items made for immediate consumption to have some "mixed" impact this year. In December, McMillon said he "did not like" that manufacturers wanted to embed more price hikes.
Walmart's margins are getting impacted because they are being very competitive with pricing, but they need to do that to get traffic in their stores, said Eric McNew, portfolio manager at Summit Global Investments.
"The consumer wants a deal. They want to save. They want the allure of savings and Walmart provides that," said McNew, whose firm holds about 350,000 Walmart shares.
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Inflation-squeezed consumers are increasingly shifting toward buying more food and consumables from general merchandise, which Rainey said will continue to be a drag on margins this year. Toys, electronics, home and apparel remain soft spots, the company said.