What Walmart and Home Depot revenue tells us about consumer spending
With inflation at the highest level in decades, investors have been hungry for clues as to how this is affecting consumer spending. After Tuesday’s strong retail sales data and two very different earnings quarters from
the answer to how Americans are coping with higher prices is still unclear – for now.
Tomorrow’s reports from
(symbol: TGT) and
(BAS) will provide more clarity, but it seems that high-income and low-income consumers are drifting further apart. Additionally, retailers won’t necessarily reap the full benefits of continued buyer strength.
First, retail sales figures rose for the fourth consecutive month in April, meeting economists’ expectations. Inflation is of course part of the equation, as the prices of everything from food to fuel have jumped, shoppers have to spend more to buy the same goods. Yet, even inflation aside, customers still seem willing and able to spend — an optimistic sign.
“Retail sales in April show that the consumer is resisting headwinds from inflation,” said Jeffrey Roach, chief economist for LPL Financial. This means that any inflationary relief could go a long way. “If pricing pressures can ease enough to relieve some of the pressure on consumers, we expect a rebound in economic growth in the second quarter.”
(HD) earnings in the positive column as well: it provided a beat-and-bump quarter – a fine achievement at any time, but especially after two years of major real estate gains and skepticism about the sustainability of the momentum of home improvement.
Rising home prices and mortgage rates have dampened the housing market, but Home Depot’s strong execution and continued consumer appetite mean those two headwinds haven’t hurt the retailer.
Joseph Zappia, director and co-chief investment officer at LVW Advisors, says he’ll want to see if home improvement trends continue over the next few quarters, but for now Home Depot is in a ideal situation. “The consumer is still very strong, but may choose to renovate rather than move,” given the increasing affordability of moving.
Barrons noted as much when he said the liquidation of home improvement retailers was overdone because they have catalysts to support earnings beyond the housing market.
Additionally, the fact that Home Depot highlighted cooler weather across much of the country that delayed the typically strong spring season means it could see greater strength in the current quarter as temperatures rise.
On the other hand,
(WMT) struck an austere note, posting a mixed fiscal first quarter and downgrading its outlook.
“We sense some conservatism at play, but the disappointing earnings performance/outlook will outweigh the encouraging revenue performance today,” noted Baird analyst Peter Benedict.
Ultimately, there are company-specific issues at play here. Walmart executives repeatedly said on the conference call that they were taken aback by the scale of some issues, such as the degree to which shoppers retreated into other categories to finance purchases of food.
At the other end of the spectrum, Home Depot’s quarter showed that it “effectively manages the supply chain and the flow of products to stores,” as CFRA analyst Kenneth Leon said in his praise of the quarter.
The upshot is that until there’s more data from Target and Lowe’s quarters tomorrow, it’s hard to extrapolate about the consumer as a whole from the two reports.
“This could be an early sign that Central America is really being hit by rising food and fuel prices – or with retail sales as good as they were and some businesses going through the quarter very well, it could indicate specific management issues,” at Walmart, says Zappia, which counts it and Home Depot among its holdings.
Still, there are three key points to remember. First, while stimulus checks and stock market gains have boosted consumers at all income levels in recent years, a bifurcation between high-income and low-income consumers is once again taking hold.
Higher wages have disproportionately helped Americans earn less, but those gains haven’t been enough to offset inflation, and as Walmart’s results show, those shoppers are taking bargain hunting seriously because they feel the pinch of higher priced essentials.
Compare that with the Home Depot results. To oversimplify, Americans who own homes and their home equity are financially stronger and are therefore more willing and able to continue spending, even on larger items like home renovations. It’s also easier to justify not buying an extra toy from Walmart than leaving a wall half painted.
The second big takeaway is that while consumers and demand remain robust, retailers won’t see the full benefits of this trend.
Walmart’s sales were better than expected, but its profits still declined as the company grappled with issues such as supply chain issues, higher wages and category spending changes that weighed on the margins. And Home Depot, despite all the good news in its quarter, also saw its gross margins plummet.
“No details were provided in the release, but we suspect the gross margin contraction…was likely due to higher transportation costs, an unfavorable change in product mix and material costs. raw materials,” as well as reinvestments in its business, writes Bobby Griffin, an analyst at Raymond James. Home Depot.
The fact that freight prices, supply chain issues and other problems remain means that even if retailers continue to enjoy strong sales, all of this will not affect their bottom line.
“We are likely to see an increase in business performance as retailers face a dynamic operating environment, including waves of Covid, supply chain disruptions and inflationary pressures,” writes David Silverman, senior director at Fitch Ratings.
Perhaps the last takeaway is that the macro is even more important to the market. Walmart is down more than 10% in a recent check, a strong reaction, while Home Depot’s early gains were sluggish about 1%, lower than gains in the broader market. Clearly, investors just aren’t ready to believe retailers just yet.
With Target and Lowe’s earnings on tap tomorrow, we’ll see if they get more confidence.
Write to Teresa Rivas at [email protected]