Walmart Slides After Slowest US Sales Growth in Six Years

0:00When your options are limited, so are your opportunities. At SIBO, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next. SIBO. Life is better with options. Your investments could be too. There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results.

0:35At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. When you're running a business, the best days are the ones where priorities stay on track. For midsize and large companies, risk can affect multiple parts of the organization at once, from property and liability to cyber and regulatory challenges.

1:13At that level, managing risk becomes an ongoing discipline. At the Hartford, the focus is on helping businesses manage risk before it turns into something more disruptive. And when losses do happen, that work is paired with insurance coverage shaped by years of underwriting, risk engineering, and claims experience. Learn more at thehartford.com slash risk mitigation. Policies provided by Hartford Fire Insurance Company and its property and casualty affiliates, Hartford, Connecticut. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m.

1:55Eastern On Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. Or watch us live on YouTube. Walmart, I mean, man, the stock's down 9.2%. That's the biggest decline since, like, May of 2022. I mean, this is a big day for Walmart. Walmart stock does not move up or down by that kind of size. I mean, it just doesn't. It's a blue chip stock. I mean, it moves up or down half of 1 % on most days. $825 billion of market cap, so some real money is being traded here today. Red Brown joins us here. He's a consumer reporter for Bloomberg News, joining us live here in our Bloomberg Interactive Broker Studio.

2:34Red, what happened with Walmart and their results? Why is the street so down and out on this name today? Yeah, I mean, the size of the move also kind of took me, made me pause as well, because it's extreme, especially for Walmart of all people. So I think the reaction really is coming from this top line mess. So Walmart's U.S. source, the same for sales, missed even the sort of most pessimistic outlook for among analysts. So I think that's probably kind of leading to some of the move that we're seeing. A big piece of the company is calling out is lower drug pricing was kind of a factor in that.

3:08But even when you strip that out, sales only grew 3.4 percent, which still would have been a slight miss, which is still kind of a rare happening for for Walmart. So I think the conversation sort of shifts to kind of what can they do now and what does this sort of mean for the wider economy? Yeah, the fact that within the earnings that got my attention was shoppers spending less per trip during the quarter. You would think that in this kind of environment with inflation being so persistent, gas prices staying high, that people would double down on a place like Walmart. What is the company saying?

3:40What did it reveal on the earnings call about how it's going to move forward then? Yeah, I think the most interesting thing that came out in an interview my colleague did and also during the call was that they cut prices on 11 ,000 items. That's almost double what they usually do at this time of the year. So I think that sort of speaks to how Walmart is going to be moving forward. The strategy has been to continue to prioritize market share. You'll hear this kind of across consumer companies, P &G, sort of similar sort of economic barometer saying very similar things. And I think that that is the sort of path forward here is we have to cut prices to keep people coming in.

4:14You know, we saw foot traffic, even though ticket was down, foot traffic was also missed results. So it's not down, so up slightly. But, yeah, people are cutting back in terms of the number of times they're shopping. And when they go, they're also probably putting less things in their basket as well. So the way forward seems to be kind of continue to cut prices. But at the same time, there's prices that are outside of their control. Right. So fuel and inflation, I mean, not inflation, sorry, interest rates, all these things that are outside of Walmart's control are weighing on the business as well.

4:4451 analysts cover the stock, which shows you the terrible economics of sell-side research. Who needs 51 analysts covering one stock? 45 buys, five holds, one sell. The street's still bullish on Walmart. Is there any reason to believe their sales softness was a Walmart issue versus more of a kind of a macro consumer issue? I that's a that's a good question um I guess I could probably make an argument for for both um look some of the strategies they're making are gonna kind of are doing are gonna contribute to lower sales right like if you are cutting the price of of a lot of items um you're gonna that's gonna lead to kind of a slowdown of the top line but at the same time if you're also seeing that less people are coming in um than expected even with these these lower lower price items um you know there's probably some sort of read that you could you could make um about kind of the health of the consumer in general.

5:34Obviously, we've seen consumer sentiment come down as well. I think some of the lower levels we've seen in kind of recent history. So that also sort of kind of leads me to believe that this is a wider issue. I just, we're all feeling it, right? Like we all see every single day the things that we're doing. We have to cut back. We have to make decisions about maybe stretching for a higher priced item. I don't think that there was a ton of discussion around sort of those items. there's more discretionary pieces, but that would also be sort of an issue that would probably make us conclude that people are just needing to trim and it's impacting even something like Walmart.

6:10Within the earnings, recent foodborne illnesses also weighing on demand for things like packaged lettuce and strawberries because groceries is a huge part of Walmart's business. Red, I know you also cover the restaurant companies. Is there anything new in that how lettuce, tainted lettuce or tainted vegetables issue right now? Nothing new off the top of my head that I could say in terms of like maybe where the outbreak is going. But what is interesting to me is sort of the sort of like secondary effects of that. So it's like, you know, you have to think about like things like croutons, right? Like if people aren't eating as much salad, like, do I need croutons?

6:47Do I need salad dressing? Right. So there is sort of these sort of like knock on secondary effects that do I need my cherry tomatoes? Exactly, right? There's so many things that you're just like, you know, nuts, whatever. You're throwing on the salads, right? It's just like it does have sort of a ripple effect to other parts of the economy. So I guess that would be sort of the newest thing that I guess we're going to keep watching is just like who else sort of has to deal with some of this fallout. Today is salad day for me, by the way. Are you still going to get a salad? Yeah. Really? You're not deterred by this at all?

7:14No, please. You've made no adjustments? None. Is the salad place less crowded than it used to be? I'll tell you what, the salad line is less crowded than in the sandwich line is very crowded but the south line i breeze right through so i mean again born and raised in new jersey i've consumed every carcinogen there is that known to man and i'm doing just fine i'm immune to all this stuff how about the supermarket side of walmart again that is a that drives traffic um they're not how's that business they're not cutting prices there are they on the supermarket or i i believe so it's if you're cutting you know 11 000 items you You know, like it's obviously going to be there displayed on the e-commerce.

7:51But the stores, the company said, like the stores are still obviously an incredibly important part of our business. So and that, you know, oftentimes, you know, if you're going to cut back to there, there's all these prices that come with e-commerce as well. Right. Like there's delivery fees, maybe not less so for someone like Walmart, you can kind of minimize some of those. But like, you know, if I'm going to be going to get gas, I'm going to be making all of my sort of grocery and errands in one trip. Right. I don't want to be driving as much as I need to be. Yeah. Right. So, you know, it does matter kind of what's going on with the stores.

8:19And yeah, they're having to make adjustments even at the sort of a keystone of the business. Before we let you go, was there anything said about spending on AI? I know they spent a lot on the e-commerce business, but did they mention AI at all in the earnings call? Off the top of my head, I'm not, I think they did say something that it's still kind of driving traffic and things like that. You're still investing there. Obviously, like, you know, big, big push on e-commerce and trying to get people to, you know, surface new things or trying to sort of predict what people might need, making sure the ads are in the right place.

8:51So definitely still part of the sort of tech drive, especially with the new CEO who has been kind of heavily involved in that with the business. So I don't imagine that that investment will probably be going anywhere anytime soon. Stay with us. More from Bloomberg Intelligence coming up after this.

9:28Life is better with options. Your investments could be too. There are risks associated with SIBO Company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. Quick one before you jump back in. You're listening for ways to help teams move faster, make sharper decisions, and turn scattered context into work they can use. ChatGPT for Business can help. ChatGPT for Business gives teams a shared workspace with admin controls, permissions, and access to work and codecs in ChatGPT. This means your business can move from question to answer and code to rollout quicker.

10:02Join over 10 million business and enterprise users worldwide already using ChatGPT for work. Download the ChatGPT desktop app or contact sales to learn more.

10:27And for that moment, it's the agentic CRM that turns customer signals into actionable insights, helping you close deals faster with revenue agents and automations working around the clock. You'll have everything you need to scale your go to market efforts. Elevate your wins with Adio. Start your free trial at adio.com slash iHeart. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Deere reported some numbers, pretty darn good numbers, and they're calling maybe the end of the cycle here that we could have an upcycle coming.

11:07And the stock's up 7 % today, up 34 % year to date. We want to talk about all those tractors and machinery stuff. We talked to Chris Chialino. He does all that stuff for Bloomberg Intelligence. Chris, you're locked in on Deere. What did we hear from them with their most recent earnings? Yeah, it was a really solid quarter and good execution in what is still a really challenging ag market as we kind of, you know, just bounce along the trough of the cycle here. They put up better than expected sales and margins across all three businesses with notable strength in some of the smaller ag equipment as well as construction.

11:43They did also benefit from a tariff refund in the quarter, which was a meaningful contributor to the beat. But I really think one of the most important takeaways from this quarter was that management noted particular strength in their early order programs for next year. So their early order programs were up mid-single digits, which was much better than we were expecting. We were looking at something more of like a flat retail market next year. So I think this certainly provides some optimism as we move into 2027. And just a red headline here crossing the Bloomberg terminal. Scott Besson, the Treasury Secretary, says he or they, someone at the White House, will be holding a press conference on Monday on Iran plans.

12:24So, of course, we will keep you posted when that happens. But again, the White House or Scott Besson will be holding a press conference on Monday on Iran plans. All right, let's get back to Christopher Cialino on Deere's latest results. Chris, what can we what have we learned about the U.S. ag cycle, farm cycle versus those outside of the U.S.? Yeah, so I think one of the takeaways from this quarter is that in North America, demand is still soft but relatively stable. We haven't seen further deterioration. You're starting to see a little bit of improvement in terms of crop prices. You still have elevated input costs.

13:02Net-net, things haven't really changed much. We're kind of bouncing along the bottom. The two regions that we're watching that you saw some deterioration during the quarter were one, Europe, and two, South America. Europe obviously has some hot, dry conditions and then a little bit more of an impact there in terms of input costs in the Iran conflict. And then down in South America, you continue to have credit constraints. Financing remains a challenge. And you have an upcoming presidential election in October. So I'd expect demand in that market to remain really challenged until we get to the fourth quarter, at least from a calendar year perspective.

13:38So the U.S. farmer still challenged. Is that what we're hearing, Chris? from the deers of the world? Yeah, you know, there really hasn't been a lot of movement. And I'd say like the improvement we have seen in crop prices, while it's encouraging, we're still, you know, at historically low levels. There's just still a lot of uncertainty around input costs. The input cost hit is going to come a little bit later in North America than compared to what you'll see in South America because of the double cropping and then obviously in Europe. But really, sentiment hasn't really changed a lot. you're starting to see a little bit of signs of optimism.

14:17But I think the biggest read across in terms of the health of the farmer and their appetite to go out and spend on equipment next year was the early order programs that Deere mentioned and that mid-single-digit increase. So again, we're coming off a low base, but it is certainly encouraging to see that we're, you know, have really kind of solidified that 26 will be the bottom. Chris, is there any kind of tariff story here with Deere, whether their goods are being tariffed when they're exported to other countries or whether parts for their equipment are being tariffed? Yes, so the tariff impact certainly played a part in their three key results.

14:53It was roughly$110 million refund benefit in the quarter. So we estimated contributed about 29 cents of the 39 cent beat. So certainly meaningful. It doesn't sound like Deere anticipates further refunds moving forward. They did have a bigger refund in their fiscal 2Q net net for the entire year. We're looking at a gross tariff headwind of somewhere in the neighborhood of one point one billion dollars. That's slightly better than they anticipated in the prior quarter of about one point two billion. And we're looking at 2027 run rate kind of in that billion dollar range. So still a headwind as we move into next year on a gross basis.

15:32Stay with us. More from Bloomberg Intelligence coming up after this. Quick one before you jump back in. You're listening for ways to help teams move faster, make sharper decisions, and turn scattered context into work they can use. ChatGPT for Business can help. ChatGPT for Business gives teams a shared workspace with admin controls, permissions, and access to work and codecs in ChatGPT. This means your business can move from question to answer and code to rollout quicker. Join over 10 million business and enterprise users worldwide already using ChatGPT for work. Download the ChatGPT desktop app or contact sales to learn more.

16:13Everyone's talking about how AI is transforming work, especially in sales. While the landscape shifts, one thing remains the same, the thrill of closing a deal. Whether it's a gong or a confetti machine, every team has its celebration rituals. Adio is designed for that moment. It's the agentic CRM that turns customer signals into actionable insights, helping you close deals faster with revenue agents and automations working around the clock. You'll have everything you need to scale your go-to market efforts. Elevate your wins with Adio. Start your free trial at adio.com slash iHeart. Innovation is what gets your business to market, and Wasabi is designed to give every business a shot at competition.

16:52How? Break free from skyrocketing storage costs and unpredictable egress fees from old and top-heavy legacy providers. You know, the big guys. Wasabi is the world's hottest cloud storage company and the go-to provider for professional and collegiate sports teams and leagues around the world. And here's why. Innovation. From Wasabi's AI-enabled intelligent media storage, Wasabi Air, to the industry's only cloud storage service with triple protection against cyber criminals, data deletion, and ransomware, the world's top companies trust Wasabi. Remember, Wasabi is up to 80 % less than market competition and doesn't charge a cent for businesses to access their own data.

17:34Wasabi, another championship story. Check them out for free at wasabi.com. Wasabi Hot Cloud Storage, proud partner of iHeart Podcast Network.

17:47You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. A lot of stuff going on in the tech space. I want to focus a little bit on Meta here. A couple of things struck me here. We're going to check in with Mandeep Singh, Global Tech Research Head for Bloomberg Intelligence. Meta Platforms is spending hundreds of millions of dollars a year to access artificial intelligence models through Microsoft's Azure cloud service.

18:21That surprised me. Should it surprise me? It can because meta is one of the biggest spenders on CapEx to build these data centers. So the natural question anyone would ask is why do they have to use someone else's cloud? That was where I was coming from. You know, so much capacity. And I think in this case, they are trying to develop a model that's kind of neck and neck with the frontier labs like Anthropic and OpenAI, but they are still trailing. So the purpose of using Microsoft Cloud could be just to benchmark against OpenAI. So OpenAI's models are available on Azure. And if Meta really wants to benchmark the performance, then they can't do it on their own infrastructure.

19:05They have to use a cloud infrastructure. And in this case, I would say they have selected the one where they are least competitive with. You know, I can't imagine Meta using Google Cloud or Amazon. So it's more like Microsoft is friendly to everyone. And it doesn't surprise me that Meta is one of their customers. Meta's stock is off 17 %-ish year to date. Is that because the street's questioning their AI spend? Is it concerned about this court trial they're in? What's kind of behind this here? Because I'm actually concerned about this trial. Although Matt Cheltenham yesterday from Bloomberg Intelligence says, I don't have to worry too much.

19:49Yeah. What do you think is impacting the stock from it? I think it's more to do with the lack of monetization on this AI spin. So with Microsoft, with Amazon, with Google, they have a cloud business to show the monetization tied to this infrastructure build out. With Meta, yes, their top line is great, but they don't have that cloud line. So, and Mark Zuckerberg did talk about renting compute the first time, but that's a lower margin business for a company like Meta, which has incremental margins of over 50%. So from that perspective, they would rather be in that model business where they are having other companies use their model that they're training.

20:29And that's where, because the model has been behind the frontier labs, no one is using their models right now. So they want to get up to speed and you really kind of get at that frontier where the hope is they will eventually figure out like open rate models have caught up to the frontier models and all these open rate models like Kimmy and DeepSea, they are challenging now the frontier labs. Why can't Meta catch up? And that's the part that has been the biggest drag on the stock, in my opinion. Does a company offer a timeline when they think they will have a competitive model? I think they will have a harder time raising 2027 CapEx if they are not able to figure that out, which is why the fallback option is to rent compute like SpaceX did to Google and Anthropic.

21:16OK, look, we can't make revenue on anything else. We can make revenue on renting our data center to Google or Anthropic. So same thing Meta could do as well. They could start renting their data center capacity to, you know, a Microsoft or someone who can make better use of it at the model there. And so that's the fallback. But Mark said that's his least favorable option. So he would rather not go in that direction. I mean, CapEx in 2024,$37 billion,$89 billion. I guess in 2026,$139 billion. Going to$200 billion next year. Yes. Is that all so that they can have an AI model? And they use a lot of AI internally.

22:03But look, if a Google is running its Google search and all YouTube and still able to generate$100 billion in Google Cloud revenue, then you have to ask yourself, why can Meta do the same? I mean, Meta has family of apps. Is that the strategy for Meta to have a cloud business? They have to have some form of cloud, whether it's renting compute or renting APIs, use of their models via APIs. They need to have some external monetization. You can't just say, I'm using entire$200 billion worth of infrastructure for my internal consumption. That is not going to fly. You need to have an external customer-facing element, and that's what they need to show.

22:44Again, are they given a timeline when they will have that? I mean, they keep saying their models are getting better, but the proof will be when they start monetizing it through APIs the way Google is doing it. That sounds like what some companies will call we're in a transition period on this whole spending, and that's what this market typically doesn't like transition periods. And especially if there's a risk like MetaWorks where you just blow through 50 billion plus of CapEx and then say we didn't get anything out of it. That's what I think the stock is reflecting right now. The fear around that.

23:17In hindsight, how do they talk about the metaverse these days? That we still believe in it, but we have pivoted towards AI. Wow. So now it's another bet on Zuckerberg to come through. The difference is all the other hyperscalers believe in this too. With metaverse, they were the only ones. No one else kind of was investing the same way as Meta was. In this case, everyone is bigger than, you know, Meta in terms of their spend. Stay with us. More from Bloomberg Intelligence coming up after this. Quick one before you jump back in. You're listening for ways to help teams move faster, make sharper decisions, and turn scattered context into work they can use.

24:00ChatGPT for Business can help. Chat GPT for Business gives teams a shared workspace with admin controls, permissions, and access to work and codecs in Chat GPT. This means your business can move from question to answer and code to rollout quicker. Join over 10 million business and enterprise users worldwide already using Chat GPT for Work. Download the Chat GPT desktop app or contact sales to learn more. Everyone's talking about how AI is transforming work, especially in sales. While the landscape shifts, one thing remains the same, the thrill of closing a deal. Whether it's a gong or a confetti machine, every team has its celebration rituals.