Walmart Is Proof of Michael Burry’s ‘Bullwhip Effect’ Warning

  • Walmart’s (WMT) profit warning shows that Michael Burry’s theories were right when it comes to low-end retailers.
  • Burry predicted that all consumer spending would tumble.
  • However, there are signs that higher-end retailers are still doing well, while spending on services and experiences remains strong.
Michael Burry - Walmart Is Proof of Michael Burry’s ‘Bullwhip Effect’ Warning

Source: Jonathan Weiss / Shutterstock.com

Walmart’s (NYSE:WMT) earnings warning indicates that Michael Burry’s recent predictions about retailers were on the money, at least when it comes to firms at the low end of the sector.

Burry, who became famous as a result of The Big Short, had predicted that retailers would overreact to small increases in consumer demand by ordering more products than they would wind up needing. The excess orders, in turn, would cause “progressively larger fluctuations in demand at the wholesale, distributor, manufacturer and raw material supplier levels.” This “progressively larger” overreaction is known as the bullwhip effect.

The famed investor also warned that consumers would lower their spending due to inflation. He argued that the combination of the latter phenomenon and the bullwhip effect would result in retailers lowering their prices. And Walmart did reduce its profit guidance because of the exact developments that Burry warned about.

Burry predicted that, this situation, will cause a “disinflationary overstock consumer recession by Christmas.”

What Comes Next

Since Walmart’s primary business is selling lower-priced goods, the company’s results only show that the poorest consumers are cutting back on their expenditures. That does not mean that lower-end consumers are reducing their spending on services and experiences or that wealthier consumers are cutting their expenditures on either goods or services.

Indeed, there are signs that higher-end retailers are still doing quite well. For example, in May, Macy’s (NYSE:M) reported much better-than-expected results, and it recently stated that it was “accelerating” the launch of “new, off-mall, small-format stores.” Similarly, in May, Nordstrom (NYSE:JWN) increased its full-year profit guidance, and research firm Piper Sandler started coverage of the shares with an “overweight” rating last Friday.

Meanwhile, on the low-end front, McDonald’s (NYSE:MCD) today reported higher-than-expected Q2 earnings per share.

During the beginning of the 2020 lockdowns, many pundits argued that the economy was going to crash and implode because of the struggles of low-end consumers. Of course, such predictions proved to be wildly off the mark.

We could be seeing a similar situation now. McDonald’s results suggest that even lower-income consumers are still spending a great deal of money on experiences and services. For Walmart, though, the bullwhip effect appears to have taken hold.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.


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