Walmart Sends Stagflation Warning With Harsh Report
As the market quickly forgets a significant Treasury buyback, the retail giant offered a concerning economic update.
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We have poor action on Thursday morning as the market’s roller coaster ride continues. Breadth is only 35% positive and small caps are leading to the downside with a loss of more than 1%. That wipes out all the gains in the Russell 2000 (IWM) since August 6.
Most notably, bonds are back down and have quickly forgotten the Treasury buyback announcement from Wednesday morning. That took about 24 hours.
Walmart Points at the Real Problem
On top of that, the Walmart (WMT) report was disappointing and the stock is down around 9%. That may be anti-inflationary but more importantly it is anti-growth, and that distinction is what the market has been slow to work out. For two weeks investors have treated soft data as good news because it takes the rate hike off the table. A weak consumer does the same thing. It also tells us the economy is slowing.
Retail is now pointing at the ugliest of all economic outcomes, which is stagflation. Inflation is above 3%, the labor market lost jobs in July with downward revisions to the prior two months, and the largest retailer in the country just told us the consumer is under pressure. Rates need to come down for the economy and they need to stay up for the inflation problem. No amount of Treasury bond buying resolves that.
One Buy This Morning
I am staying defensive. I mentioned a few biotechnology sales I made into strength on Wednesday and I may cut a bit more if support comes under pressure. I did make one buy on Thursday morning.
Butterfly Network (BFLY) makes handheld ultrasound devices built around a semiconductor chip rather than the traditional crystal probes, which is what lets a whole-body scanner fit in your hand and connect to a phone. The company also sells cloud software and AI tools around the hardware.
The more interesting part of the business now is licensing that chip to other manufacturers, and the second quarter showed why. Revenue came in at $32.6 million, up 39% and well above the $29.9 million consensus, but the number that matters is the gross margin, which jumped to 71.4% from 63.7% a year ago. That happened because the licensing business grew 439% to $10.8 million, and software and services now account for more than half of total revenue. The largest of those agreements is a five-year deal with Midjourney carrying a $15 million upfront payment and $10 million in annual license fees.
Management raised full-year guidance to a range of $119 million to $123 million, which is 22% to 26% growth, and the adjusted EBITDA loss narrowed to $1.4 million from $6.2 million. The company is still losing money on a GAAP basis with $30 million of operating cash burn in the first half, but it holds $124.7 million in cash, so there is no near-term financing pressure.
The main reason I bought is the chart, which has been building well while most of the market has been struggling. Part of what is driving that is likely a purchase by director Louise Phanstiel, who bought 115,200 shares on August 14 at an average price near $8.68, a transaction of roughly $1 million.
This is an open market buy and not part of 10b-5 plan. Most insider transactions are scheduled in advance and tell you nothing. This one was a decision made in the moment with her own money, and she already held a substantial position before adding to it.
I will note there has been selling from other insiders as well, including a sale of nearly 400,000 shares in early July, but that could have occurred for any number of reasons other than company fundamentals. Insider buyer are made for only one reason which is confidence in the stock.
Game Plan
My positioning has not changed and today reinforces it. Cash is high, I am selective, and I am moving in small increments.
The Walmart report is the kind of information that takes time to work through a market. It arrived on a morning when bonds were already giving back Wednesday’s relief and small caps were erasing two weeks of gains. That combination is what a shift in character looks like, and I would rather be watching it with cash than participating in it.
At the time of publication, DePorre was long BFLY.
