It's An Awkward Time For Retail Therapy

You can get a lot of stuff from America’s big-box retailers – including a read on how well the country’s consumers are doing (and, in turn, what may be next for the economy). That’s what we got this week, and it wasn’t altogether uplifting.

🕰 Recap

• On Tuesday, Home Depot reported declining earnings last quarter and provided a disappointing outlook for the remainder of the year. Read our story
• Target fared better when it announced its results a day later, reporting earnings that exceeded analyst estimates and maintaining its full-year forecast. Read our story
• Walmart capped things off on Thursday with results that blew past expectations, prompting the firm to raise its outlook for the rest of the year. Read our story

✍️ Connecting The Dots

Investors love to closely scrutinize big-box retailers’ performances as they provide valuable insights into consumer spending – the biggest driver of the US economy. And the results this week from these three important firms are painting a mixed picture of the American consumer. Economic uncertainty and still-high inflation are leading to a pullback in home-improvement spending and purchases of big-ticket items like patio sets and grills, which caused a big drop in sales at Home Depot last quarter. Making matters worse, the firm said it now expects revenue to decline as much as 5% in 2023 – its first annual fall in 14 years – having previously predicted roughly flat sales for the period.

Target fared slightly better. Amid soaring consumer prices, the firm’s nice-to-have offerings fell out of fashion, but it saw customers flock to its stores for groceries and other everyday essentials, with store traffic actually up compared to last year. That meant Target managed to squeeze out a tiny 0.6% increase in revenue last quarter, compared to a year ago. But the firm did warn that shoppers spent less as the quarter went on. So to keep expectations in check, it cautioned that the quarter ahead could be a slow one and maintained its pretty conservative full-year outlook.

Walmart rounded things off with blockbuster results. The world’s biggest retailer has got a knack for scooping up customers from pricier stores into its budget-friendly food aisles – and that’s worked especially well as consumers have tightened their purse strings in the face of high inflation. The firm saw sales at its stores open for a year or more rise by 7.4% last quarter from a year ago, while ecommerce revenue ballooned 27% – its highest growth rate since the pandemic-driven surge. That all helped Walmart’s earnings to handily beat investor expectations – and the strong start to 2023 gave it the confidence to lift its full-year outlook too, with the firm now forecasting sales to climb by 3.5% from the year before.

🥡 Takeaways

1. Sticking to the essentials

Walmart is still cautious in its assessment of the American consumer, which is understandable given the warning signs indicated by its own sales trajectory, and Target’s. Both firms said sales were strongest in February, then softened in March, and dipped further in April. That’s causing investors to become more anxious about consumer spending and the potential impact on the economy. US shoppers, after all, are increasingly resisting furniture, apparel, and electronics purchases just to afford necessities. What’s more, about 90% of consumers are skimping on groceries, buying only what’s absolutely needed, and forgoing stuff like air fresheners and lawn fertilizer, according to a survey by NIQ.

2. Tale of three retailers

Those changing spending habits are reflected in the three big-box retailers’ results. It’s noteworthy that Home Depot – a consumer discretionary company – fared the worst, while Walmart – a consumer staples firm – blew the lights out. Target, meanwhile, with its mix of staples and “cheap chic” discretionary fare, landed somewhere in the middle. That overall trend could continue, especially amid growing worries about a US recession, which would cause investors to flock to defensive sectors like consumer staples.

🎯 Also On Our Radar

AI has the potential to give a big boost to long-term profit margins, Goldman Sachs said in a research note this week. The investment bank’s economists estimate that generative AI could potentially lift US productivity growth by roughly 1.5 percentage points per year over the next ten years following its widespread adoption. And based on the historical relationship between productivity growth and corporate profitability, that suggests a rise for S&P 500 profit margins of roughly four percentage points over the next decade, all else being equal.