Walmart’s operations looked to have stabilized after the company’s guidance was forced to admit it was facing a rough patch due to surging inflation for food and gas.

The company had revised its full-year profit guidance downward, from 11% to 13%, down to 9% to 11%

However on Tuesday, Walmart stock was up 4% in pre-trading after sales came in better than expected, and the company posted a 15 cents per share beat of Wall Street Profit expectations.

Walmart’s CFO, John David Rainey gave a wide ranging interview, covering the quarterly report and the company’s outlook, which highlighted several interesting points.

Speaking of the US consumer sale preferences he is seeing, he notes consumers are now noticeably trading down, and this is producing three effects. He explained, “One is there’s a trade down in both quality and quantity. So instead of buying deli meats, we’re seeing things like canned tuna and chicken and even beans, as units were up over 25% in the quarter. They’re buying smaller pack sizes to save money. We’ve seen an increase in the private brands growth effect, it’s 2x for food what it was in the first quarter.”

He also noted that the increase in inventory cost is due to inflation and it appears it will last around two quarters. He said, “About 40% of the $11 billion increase [in inventory] is just related to higher prices, inflation. I think the problem is going to persist through the third quarter, and probably even bleed into the fourth quarter a little bit. But our hope is that as we come out of the end of the year, we are in a much better position as we go into the next fiscal year.”

He did sound tempered on the start of the back-to-school season, saying, “I would probably characterize it as encouraging. I wouldn’t say strong. I would say it’s encouraging by some of the signs that we’re seeing most notably in school supplies versus apparel at this point. But even as we get into the beginning weeks here of the third quarter, we see that those encouraging signs continue.”

He also notes that the company can see the relationship between gas prices and consumer behavior show up in their sales records very quickly, saying, “So we’ve not seen a pronounced shift in our mix just yet, but we ended the second quarter a little bit stronger than what we expected. And we do kind of deduce that that’s related to lower fuel prices. If you look at May and June, even the first quarter fuel prices were going up and we were seeing that’s when the mix in our business was changing. As we got into the back half of July and fuel prices came down, we saw some more encouraging signs and general merchandise.”

Still the company is adjusting to the new post-pandemic profile of profitable inventory items. In another interview, Rainey noted that the company still had about $1.5 billion in inventory, “that if we could just wave a magic wand, we’d make it go away today.” As a result the company foresees cutting hundreds of billions of dollars in fourth-quarter orders to get back on track.

However if inflation can be brought under control, fuel prices keep dropping, and the Fed avoids triggering a major economic downturn, the company could make up for any performance shortfalls, as the year goes on.