Walmart Bubble Due to High Income Spending on Groceries, Bill Simon Warns

Higher income consumers could create a frothy situation Walmart.

Even though affluent consumers contributed to the retailer’s latest quarterly results, former Walmart US CEO Bill Simon warns it will be difficult to maintain these results.

“The Walmart experience is better than it used to be, but it’s still not a premium experience. Walmart is built on convenience, cost and selection. Not service,” he told CNBC’s “Fast Money” on Thursday. “As economic challenges subside… service will become more important than convenience and price. And we will see a shift in some consumers. That’s the bubble.”

His warning comes with Walmart stock hitting all-time highs dating back to August 1972, when it happened started trading on the New York Stock Exchange. Shares rose nearly 7% on Thursday after the discount retailer’s adjusted earnings and revenue for its fiscal first quarter exceeded expectations. Walmart reported that high-income consumers helped boost profits, especially in the grocery sector.

“The challenge is that the tailwind from food inflation that has propelled Walmart will eventually reverse,” said Simon, who sits on Walmart’s boards. Darden Restaurants And Hanesbrands.

Last October, Simon warned in ‘Fast Money’ that bargains were losing their magic as consumers began to succumb for the first time in a decade. His call at the time applied to lower-income consumers.

Simon now claims that higher-income consumers going to Walmart is not good news for the broader economy.

“When money is tight, people respond — even high-end consumers respond,” he said.

Despite his bubble warning, Simon thinks Walmart is a “great investment” for the next 12 months.

“As long as there is inflation and the tailwind that comes mainly from food inflation, there will be more traffic coming into the Walmart store,” Simon said.

But he thinks stocks could hit a rough patch in 24 months as inflation falls and higher-end consumers shift away from shopping at discount retailers.

“As inflation slows and service becomes more important than price, some of those tailwinds will become headwinds,” Simon said.