Big box stocks see strength in consumer spending

They may be spending differently, but consumers are still spending.

Evidence of this emerged in the second-quarter earnings results for big-box retailers this week, although it’s clear that some companies are performing better than others in a tough environment. Additionally, the US Census Bureau reported that retail sales were flat in July, rising less than 0.4% excluding auto sales, slightly better than expectations for no gain. Gasoline spending fell as prices fell, leaving more money for spending on building materials, garden equipment, personal care products and online shopping.

Retail giants Walmart (WMT) and Home Depot (HD) reported better-than-expected second-quarter sales and earnings on Tuesday, pushing their stocks higher and driving gains in the broader stock market, including the Morningstar US Market Index.

“These reports go some way to allay widespread fears of an impending recession,” says James Paulsen, chief investment strategist at Leuthold Group. “Retail businesses are facing tougher opposition to price increases, but so far price inflation hasn’t halted consumer spending and that’s getting businesses through this tough time. “

Walmart and Home Depot on track to meet or beat full-year outlook

Adding to the good news, Walmart and Home Depot said they would meet or improve on their full-year financial targets by cutting costs, eliminating inventory, raising prices and continuing to attract customers. Walmart CEO Doug McMillon told CNBC that its stores were attracting more households with an annual income of $100,000 or more. “People are really price driven now, regardless of income level,” McMillon said.

Target (TGT) raised second-quarter revenue 3.5% to $26 billion, beating estimates, and said same-store sales rose 2.6%. Still, the company surprised investors with a 90% drop in earnings, even after lowering its forecast twice in May and June. The company blamed aggressive markdowns on excess merchandise for the slump in profits.

Target said “Current trends support the company’s prior guidance for full-year revenue growth in the low to mid-single digit range and operating margin rate in the mid-single digit range. %” in the second half. That would compare to an operating margin rate of 1.2% in the second quarter.

Lowe’s (DOWN) posted a better-than-expected net profit of $3 billion and earnings per share of $4.67. Sales were $27.5 billion, below estimates and just below the $27.6 billion posted the previous year. Lowe’s now expects its operating margin to be in the upper end of its outlook range of 12.8% to 13%, and full-year EPS to be in the mid-range. upper end of its range of $13.10 to $13.60. Sales are expected to be in the low end of its $97 billion to $99 billion range. Same store sales are expected to range between a 1% decline and a 1% increase.

Lowe’s Managing Director, Marvin Ellison, summed up the quarter by saying the company continues to see “continued strong demand for our new and innovative products at higher price points.” He added that DIY customers “remain resilient, reflecting the continued strong trend in home improvement demand.”

What a difference a quarter makes: Just three months ago, disappointing first-quarter results from Walmart and Target spooked investors and led to the market’s biggest one-day selloff in two years. Then, companies and investorscaught off guard by rapidly rising prices and changing consumer behavior.

Inside Walmart’s second-quarter results

This week, Walmart reported an 8.4% increase in total revenue to $152.9 billion in the second quarter of fiscal 2023, and consolidated operating profit of $6.9 billion, or earnings of $1.88 per share, beating analysts’ expectations on both fronts.

The world’s largest retailer said same-store sales rose 6.5% in the quarter compared to the year-ago period. Analysts had expected growth of 5.9%. It maintained its full-year forecast of same-store sales growth in its U.S. operations of about 4%, excluding fuel. It now sees adjusted EPS falling 9% to 11%, an improvement from an 11% to 13% decline it forecast just a few weeks ago.

Markdowns on excess inventory and weak double-digit growth in grocery sales continue to erode profit margins. Customers of all income levels are increasingly dwindling, the company said.

“Instead of higher priced deli meats, customers are increasing their purchases of hot dogs as well as canned tuna or chicken,” Chief Financial Officer John David Rainey said, citing one example.

Rainey also noted that private label products are more popular, particularly in the food category where “the growth rate for private label has doubled from first quarter levels.”

Walmart is making progress in destocking as softness in high-end product categories persists.

“We’ve eliminated most summer seasonal inventory, but we’re still focused on reducing exposure to other areas such as electronics, home and sporting goods,” Rainey said. “We have also canceled billions of dollars in orders to help bring inventory levels in line with forecast demand. We estimate that only about 15% of our total inventory growth in the second quarter is still above optimal levels. »

Its Sam’s Club unit, through which members buy branded products in bulk at wholesale prices, reported same-store sales growth of 9.5%, excluding fuel. Member revenue increased by 8.9% as the total number of members reached an all-time high.

Morningstar equity analyst Zain Akbari was heartened by management’s suggestion that the worst of the close is likely over as it moves aggressively to eliminate excess commodities. And he noted improving sales trends in the final weeks of July, with a strong start to the back-to-school season as fuel prices fell.

Still, at a recent price of $139.59 per share, Walmart is trading above its fair value estimate of $138. “We continue to expect low-digit annual revenue growth and mid-single-digit operating margins over the long term and suggest that potential investors wait for a greater margin of safety,” said Akbari in a 3-star rating, wide- Walmart rated moat.

Home Depot has its best quarter ever

Home depositthe world’s largest home improvement retailer, posted the highest quarterly sales and profits in company history.

Second-quarter sales increased 6.5% to $43.8 billion from the same period last year. Comparable store sales increased 5.8% in the quarter, with US comparable sales increasing 5.4%. Net income for the second quarter was $5.2 billion, or $5.05 per diluted share, compared to net income of $4.8 billion, or $4.53, for the same period. 2021, representing an 11.5% increase in diluted EPS.

The Home Depot also reiterated its previous guidance for 2022:

  • Growth in total and comparable sales of approximately 3%.
  • Operating margin of approximately 15.4%.
  • Percentage growth of diluted EPS growth in mid-figures.

While all of its merchandising categories posted positive year-over-year comparisons, demand was mixed. Sales in the Electrical, Decor & Storage, Kitchen & Bath, Outdoor Garden, Tools, Appliances, Indoor Garden, Lumber & Flooring sectors were up. were positive but below company average, Home Depot said.

Building materials, plumbing, carpentry, paint and hardware were all above average, boosted by professional and DIY home improvement projects. Order books remain strong and large deals over $1,000 were up 11.6% from the second quarter last year, driven by demand for pipes and fittings, gypsum and fasteners in its professional category.

Home Depot Chief Financial Officer Richard McPhail noted that times remain precarious and unprecedented. But he expressed optimism about consumer strength.

“We’re also seeing engaged and resilient homeowners with strong balance sheets, consumers spending more time in their homes, and continued structural support for demand for home improvement projects,” McPhail said.

Morningstar Senior Equity Analyst Jaime Katz noted that wide-moth 2-star Home Depot shares at a recent price of $325 per share are trading at a 25% premium to his estimate of fair value. of $264. While the company’s second-quarter results exceeded expectations, it notes that, “despite these upbeat results, the two-year comparable growth of 10.3% was a significant decline from the above-20 rates seen over the past of the past two quarters, implying that growing demand will continue to normalize.

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