Walmart: retail investors need to know their LIFO from their FIFO
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Same-store sales, margins, inventory levels — these are some of the metrics investors look at when it comes to retail stocks. These days, they must also get to grips with LIFO, FIFO and COGS. An alphabet soup of inventory accounting terms has been appearing with increasing frequency in US earnings results.
Walmart is the latest to flag it. The $400bn retail giant on Tuesday said it expected LIFO charges to shave $1bn off its gross profit for next year. The disclosure — made during a call with analysts — comes after the company delivered better than expected third-quarter results and said earnings this year would not fall by as much as feared.
LIFO stands for “last in first out”. Under LIFO, companies assume the goods they sell first are the newest in inventories. In a high-inflation environment, newer goods cost more than older ones. This means the cost of goods sold (COGS) will be higher, reducing profits.
The flipside is FIFO — or “first in first out”. This accounting method, commonly used by sellers of perishable goods, assumes companies draw down older inventory first, meaning older, cheaper goods get expensed as COGS.
About 15 per cent of companies in the S&P 500 used LIFO as their primary inventory method and half used FIFO last year, according to Credit Suisse. The rest used an average-cost method, which is a weighted average of all inventory purchased over a certain period of time, or methods that could not be determined.
Walmart generated $147bn in gross profit last year. The $1bn hit is marginal and also prudently large. Still, understanding how LIFO works helps put inventory and margin numbers in perspective. Walmart said on Tuesday it had “significantly improved” its inventory position in the third quarter. This stood at $64.7bn at the end of October. That is up from $57.5bn a year ago.
There are fewer inventory writedowns under LIFO during inflationary periods, accounting experts say. That reduces potential shocks to investors. But it does not absolve retailers such as Walmart from their responsibility to predict trends intelligently and manage stock leanly.
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Letter in response to this article:
Understanding Walmart’s inventory conventions / From Tim Sutton, Brackley, Northamptonshire, UK
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