Walmart reported on Tuesday that sales increased by more than 8%, while earnings contracted in the fiscal second quarter as customers resorted to the discounter for groceries and necessities.

In early morning trade, shares gained more than 5%.

The retailer’s results exceeded analysts’ estimates, but they mimicked a profit warning issued by Walmart last month, when it claimed inflation-stricken buyers were buying less high-margin discretionary products like garments while spending more on basics.

Walmart anticipates that these spending habits will continue. It confirmed its expectation for the second part of the year, despite selling through excess inventory. It anticipates Walmart U.S. same-store sales to increase by roughly 3% in the second half of the year, or around 4% overall.

It expects adjusted profits per share to fall between 9% and 11% for the entire year.

“We expect inflation to continue to influence the choices that families make and we’re adjusting to that reality so we can help them more,” McMillon told analysts on a conference call.

Walmart’s net income for the quarter increased to $5.15 billion, or $1.88 per share, from $4.28 billion, or $1.52 per share, the previous year.

Walmart U.S. same-store sales increased 6.5 per cent year on year in the second quarter, excluding gasoline. According to StreetAccount, this was more than the 5.9 per cent growth projected by analysts.

E-commerce revenues increased 12 per cent year on year and 18% over the previous two years.

Inflation, which raises the prices of food and other things, contributed to some of Walmart’s sales growth. It also benefited from the fact that families of all income levels visited its stores and website.

According to Chief Financial Officer John David Rainey, the retailer’s reputation as a discounter is drawing more middle- and upper-income customers.

Customers with yearly family incomes of $100,000 or more accounted for over three-quarters of Walmart’s food market share growth.

According to him, Walmart is witnessing indicators of a budget-conscious consumer who is trading down “in terms of quality and quantity.” For example, he stated that buyers are increasingly using credit rather than debit. They are purchasing smaller food packages and canned tuna and beans instead of deli meats and steak.

“Clearly, they’re stressed from higher gas prices, higher food prices and even housing,” he said.

Walmart’s own brands, which are normally less expensive, have also gained traction. Private label product sales are expanding twice as fast as they were in the first quarter, according to Rainey.

In grocery, the company saw low double-digit comparable sales growth, while health and wellness had high single-digit gains. General goods sales declined in the mid-single digits due to weakness in electronics, clothes, and home products, according to the business.

Back-to-school sales are off to a great start, with parents purchasing backpacks and other necessities, according to Rainey.

Target shares rose roughly 2 per cent in premarket trade in response to Walmart’s announcement. Target is scheduled to release its most recent quarterly results on Wednesday morning.

Walmart is combating earnings pressure by pursuing new revenue streams, such as its subscription service Walmart+. It announced that subscribers of the programme will have free access to Paramount+ beginning in September.

Walmart and Target have both issued warnings in recent months that they needed to discount some items in order to move them off shelves and out of store backrooms before the crucial holiday season, which would reduce profitability in the short term.

Walmart, for example, has seen a significant reduction in apparel sales over the last six months. On a conference call with analysts on Tuesday, CEO Doug McMillon said that the company’s inventory position reflected weird comparisons as well, as it follows a year-ago period with exceptionally strong demand and larger out-of-stocks.

Walmart’s inventory levels in the United States increased 25.6% year on year in the second quarter, owing primarily to inflation and higher quantities of general products, according to the business.

Rainey stated that 40% of the $11 billion increase in inventory is due to rising product costs due to inflation. Walmart would like to “wave a magic wand” to make about $1.5 billion disappear, he added.

Walmart is selling off excess inventory with markdowns and has “cancelled billions of dollars to help align inventory levels with predicted demand,” according to Rainey on an earnings call. He estimated that around 15% of the company’s inventory growth is above desired levels.

On a conference call with analysts, McMillon stated that Walmart had also identified ways to cut costs. For example, he stated that Walmart cut the amount of shipping containers in its system by more than half compared to first-quarter levels, bringing them considerably closer to historical averages.

He predicted that by Halloween, Walmart’s inventory would be in better shape.

“I expect a strong finish to the back-to-school season and we will quickly transition to the holidays,” he told analysts.

Inflation has also attracted new customers to Walmart’s membership-based warehouse club, Sam’s Club. In the third quarter, membership reached an all-time high. According to StreetAccount, the club’s same-store sales increased 9.5 per cent excluding gasoline, which was somewhat lower than the 10.1% predicted.

Walmart shares were down nearly 8% year to date as of Monday’s close. Shares closed at $132.60 on Monday, raising the company’s market worth to $363.48 billion.

(Adapted from CNBC.com)