What Walmart and Home Depot Earnings Tell Us About Consumer Spending – Barrons

First, retail sales figures rose for the fourth straight month in April, meeting economists’ expectations. Inflation is of course part of the equation—because prices of everything from food to fuel has jumped, shoppers have to spend more just to purchase the same goods. Yet even outside of inflation, customers seem genuinely still willing and able to spend—an upbeat sign.

“Retail sales in April show that the consumer is weathering the inflationary headwinds,” notes Jeffrey Roach, chief economist for LPL Financial. That means that any inflationary relief could go a long way. “If pricing pressures can moderate enough to relieve some of the pressure on consumers, we expect a rebound in economic growth in the second quarter.”

Count

Home Depot
’s
(HD) earnings in the positive column too: It provided a beat-and-raise quarter—a nice achievement at any time, but especially so after two years of major housing gains and skepticism about the sustainability of home improvement momentum.

Rising home prices and mortgage rates have been a drag on the housing market, but Home Depot’s strong execution and ongoing consumer appetites means those two headwinds haven’t hurt the retailer.

Joseph Zappia, principal and co-chief investment officer at LVW Advisors, says that he’ll want to see if home improvement trends hold in the coming quarters, but for now, Home Depot is in a bit of a sweet spot. “The consumer is still really strong, but may choose to do home improvements over relocating,” given increasing unaffordability of moving.

Barron’s noted as much when it said the selloff in home improvement retailers was overdone, as they have catalysts to bolster profits beyond the housing market.

In addition, the fact that Home Depot highlighted cooler weather across much of the country that delayed the typically strong spring season means that it could see further strength in the current quarter, as temperatures rise.

By contrast,

Walmart
’s
(WMT) struck a dour note, notching a mixed fiscal first quarter and lowering its outlook.

“We sense some conservatism at play, but disappointing profit performance/outlook will outweigh the encouraging top-line performance today,” notes Baird analyst Peter Benedict.

Ultimately, there are company specific issues at play here. Walmart executives said several times on the conference call that they were caught off guard by the magnitude of certain issues, such as the degree that shoppers pulled back in other categories to fund food purchases.

On the opposite end of the spectrum, Home Depot’s quarter showed that it’s “effectively managing the supply chain and flow product to stores,” as CFRA analyst Kenneth Leon said in his praise of the quarter.

The upshot is that until there is further data from Target and Lowe’s quarters tomorrow, it’s difficult to extrapolate about the consumer as a whole from the two reports.

“This could be an early tell that middle America is being really impacted by higher food and fuel prices—or with retail sales being as good as they were and some companies coming through the quarter just fine, it could point to management-specific issues,” at Walmart, says Zappia, who counts it and Home Depot among his holdings.

Yet there are three key takeaways. First is that while stimulus checks and stock market gains boosted consumers of all income levels in recent years, a bifurcation between higher and lower income consumers is once again taking hold.

Higher wages have disproportionately helped Americans making less, but those gains haven’t been enough to offset inflation, and as Walmart’s results show, those shoppers are taking bargain-hunting seriously as they feel the pinch of higher priced essentials.

Contrast that with Home Depot’s results. To grossly oversimplify, Americans with homes and home equity are financially stronger, and thus are more willing and able to keep spending, even on bigger ticket items like home renovation. It’s also easier to justify not buying an extra toy at Walmart than leaving a wall half painted.

The second big conclusion is that even if consumers and demand remain robust, retailers won’t see all the benefit of that trend.

Walmart’s sales were better than expected, but its profits still came in lower, as the company dealt with things like supply-chain issues, higher wages, and category spending shifts that weighed on margins. And Home Depot, for all the good news in its quarter, saw its gross margins also fall.

“No detail was provided in the release, but we suspect the gross margin contraction…was likely due to rising transportation costs, unfavorable product mix shift, and commodity costs,” as well as reinvestments in its business, Raymond James analyst Bobby Griffin writes about Home Depot.

The fact that freight prices, supply-chain problems, and other woes remain means that even if retailers continue to enjoy strong sales, not all of that will flow to their bottom lines.

“We are likely to see increased choppiness in corporate performance as retailers contend with a dynamic operating environment, including Covid waves, supply chain disruptions, and inflationary pressures,” writes David Silverman, senior director at Fitch Ratings.

The final takeaway may be that the macro may still matter more to the market. Walmart is down more than 10% at recent check, an emphatic reaction, while Home Depot’s early gains have winnowed to about 1%, lower than the broader market’s gains. Clearly investors just aren’t ready to believe in retailers again just yet.

With both Target and Lowe’s earnings on tap tomorrow, we’ll see if they get any more confidence.

Write to Teresa Rivas at teresa.rivas@barrons.com