Two of the largest US retailers have allayed fears of a recession by reporting solid consumer spending despite the fact that their customers are suffering from high food and gasoline expenses. Walmart, the biggest retailer in the world, claimed that despite its most price-sensitive customers switching to less expensive foods, there had been some progress recently. The DIY retailer Home Depot reported that recent weeks had seen an increase in business as a result of “extremely high” expenditure on home improvements.
Investors searching for hints about how US consumers have adjusted to historically high inflation and increasing interest rates have been alarmed by Walmart’s two profit warnings since May. However, the company said on Tuesday that sales and profits for the three months ending in July were higher than anticipated, and it also predicted that full-year earnings would decrease less than it had previously foreshadowed just three weeks earlier. The new chief financial officer of Walmart, John David Rainey, remarked, “We closed the quarter on a high note.
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The back-to-school season was “off to a strong start,” he continued, adding that retail traffic increased in July and August. Home Depot posted its best quarterly sales and earnings on record, claiming that despite high inflation and mortgage rates, consumers were spending on home improvement. The US economy still has many “cross-currents,” according to CEO Ted Decker, who also noted that the labour market, wage growth, and savings rates are all still healthy.
Walmart’s announced earnings of $1.88 per share for its fiscal second quarter were higher than analysts’ expectations of $1.62 per share by 23% year over year. The results, which came on the heels of an 8.4% gain in revenues to $153 billion, nevertheless demonstrated the impact of inflationary pressures on Walmart customers, many of whom have reduced spending on apparel and other general products as their gas and grocery costs have increased. According to Rainey, lower-income consumers were switching from deli meats to less expensive hot dogs, canned tuna, and chicken.
Doug McMillon, the CEO of Walmart, did add that the company was expanding its market share as more affluent customers used its e-commerce platforms and physical stores to save money. Walmart has surplus inventory, notably in the clothes category, as it had warned in July due to changes in consumer spending caused by inflation. Its gross profit margin for the quarter fell by 132 basis points as a result of markdowns to get rid of that stock.
Housing IS getting crushed with the interest rate rise. All the clowns getting out of the car, respectfully, have no clue. I’be been a residential real estate appraiser for 29 years. My volume has been cut in half in the last month. Most EVERY sales price is being cut.
— Damon Smith (@lemonade_smith) May 16, 2022
At the end of July, Walmart’s stocks totaled $60 billion, up 25% year over year in part due to inflation and efforts to avoid the “lean” inventory position it had during the last holiday season. Rainey claimed that while Walmart had sold the majority of its summer seasonal inventory, it still had excess stock in the categories of electronics, home goods, and sporting goods. Compared to its prediction from last month, when investors should anticipate a decline of 11 to 13 percent, Walmart now anticipates a 9 to 11 percent decline in operating income over the course of the entire year.
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According to McMillon, Walmart’s prediction was based on the belief that the consumer environment in the third and fourth quarters of the fiscal year will “look quite similar to [the second quarter]”. The improved forecast from two of the biggest US retailers was well received by investors, which led to Tuesday’s gains of 4.1% for Home Depot and 5.1% for Walmart. Shares of competitors in the same industry increased due to the positive outlook. Target, a retailer, and Lowe’s, a DIY company, both reported results on Wednesday morning. Both saw increases of 4.6% and 2.9%.
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