Walmart faced a roughly $400 million surprise expense last quarter

Until the pandemic, the annual cost increase of what it costs to settle these had been very constant over the past two decades — roughly 1% per year — the CFO explained. “Post-Covid, for a number of reasons, we began to see the cost increase, and we’ve also increased our accrual since that period of time,” he said.

But in more recent quarters, the cost to settle these claims has increased even more than the company expected and budgeted for. Rainey expects it to be more expensive going forward. It’s unclear which cases in particular he may be referring to, and the company did not immediately respond to a request for further comment.

“It’s disappointing that this is a larger amount and surprising to all those on the call,” Rainey said, though he added that surprises happen when a business is as large and complex as Walmart.

What this could include

It is also not clear what led to this unexpected increase for Walmart in settling these claims.

Rainey only mentioned injuries, but general liability insurance can also include property damage or other liabilities. He said for each of those incidents, the company self-insures and accrues a certain amount it expects to be the cost to settle those liabilities in the future.

“A lot of those are settled,” Rainey said. “In fact, the vast majority are settled just by us handling that with our customers. Sometimes, they go to torte, and that often results in them becoming more expensive. It’s a smaller percentage of them overall, but also a more expensive bucket there.”

He also noted that this is not a case of the company having more incidents, which he said have declined year over year — just that costs have gone up.

“We continue to emphasize safety and other measures in our stores to try to bring down [the] number of incidents.”

Karen Kelso, a vp for the research firm Kantar, said it could also be due to factors such as property loss due to unpredictable weather; higher costs to insure pricey new, automated distribution centers; increasingly expensive property costs, in general, or increased security for executives.

No more surprises

Rainey said the company’s operating income guidance remains unchanged despite the unforeseen costs representing three-quarters of a billion dollars in additional expenses.

That “really speaks to how we’re feeling about the momentum in the business and the strength of the core business overall,” Rainey added. The liability can span about $1 billion from the low end to the top end, according to the CFO.

“Based upon our expectation right now, we like where the accrual is at roughly the midpoint of that overall liability,” Rainey said. “I do think we’re going to experience higher costs into the future, but we don’t expect it to be a surprise like it was this quarter, or, said differently, to be more of a catch-up in this period.”

Mickey Chadha, a retail analyst and vp of corporate finance for Moody’s, said he doesn’t see the costs as substantial compared to Walmart’s overall profitability, especially as it is built into the company’s profitability guidance. The company still made $33.7 billion in gross profit last quarter, up 5.8%, and operating income of $6.7 billion, up 2%.

“This quarter [in terms of the claims costs] was higher than what they previously expected, but it doesn’t mean the next quarter will be the same,” Chadha said. “These come as settlements happen and that liability is put on, but it’s not something that you can extrapolate to say that it’s going to be the same amount next quarter, because these things are volatile.”

What this means for other retailers

Walmart’s handling of this situation could be a lesson to retailers who aren’t as large as the big-box giant.

Tom Faulkner, clinical professor of risk management and insurance at Butler University in Indianapolis, said his reaction was that Walmart has still been practicing good risk management by budgeting the losses it expects to have due to general liability claims — despite this quarter’s being unexpectedly large.

Faulkner said small retail operators, like those that may just have one store, don’t always do this. He recommends that any company, even those not as large as Walmart, should look back at their previous liability losses and estimate what the costs may be moving forward, such as by averaging the number of liability claims in one year and budgeting for that in the next year.

“The most efficient way for you to pay those small liability losses is to just budget for them,” Faulkner said. “Pack three cents on your product or whatever, but budget for them. … And then, as you retain your expected losses, you can increase your deductible on your liability insurance, which is going to lower the cost of the liability insurance.”