Doors Swing Open on Q1 Retail Earnings Season

May 14, 2024
Walmart kicks off retail earnings season as high interest rates and inflation raise concerns over continued robust consumer spending.

As the unofficial start to retail earnings season arrives this week, investors face a tangle of conflicting or confusing signals that might be distilled in a single question: Will the real U.S. consumer please stand up?

Quarterly numbers from Home Depot (HD) and Walmart (WMT) this week and other big retailers in the weeks ahead may help answer that question.

Consumers are still spending, just on different and perhaps cheaper things—"trading down" in industry parlance. In recent months, they've also grown increasingly weary of high interest rates and persistent inflation, but they still want nice things like vacations and home furnishings (more on the retail big picture below).

That should make the impending slate of retail earnings of keen interest to those seeking further insights into the health of the consumer, and by extension, the U.S. economy. The unofficial start to the Q1 retail earnings season began this week with Home Depot reporting results before Tuesday's market open. The company's earnings surpassed expectations but fell short of revenue forecasts, illustrating ongoing struggles among home improvement retailers as high interest rates burden consumers and housing.

Walmart, the biggest U.S. retailer by sales, is scheduled to report results Thursday.

As the retail earnings season unfolds, there are several storylines worth following.

Investors bulled up on (some) retail stocks

By some measures, retail has been one of the U.S. stock market's top-performing sectors in 2024. The S&P Consumer Staples Merchandise Retail index, a subsector of the S&P 500® index (SPX) that includes Costco Wholesale (COST), Target (TGT), and Walmart, gained more than 13% this year through May 14, outpacing the 9.5% advance for the S&P 500 index.

Much of that strength has been driven by big-box discounters or club stores, such as Costco and BJ's Wholesale Club (BJ), which have gained 17% and 16%, respectively, through mid-May.

Shares of department stores and specialty/niche retailers haven't fared as well. Kohl's (KSS), for example, has tumbled more than 6%, while Foot Locker (FL) has lost about 25% and Ulta Beauty (ULTA) has fallen more than 17%.

Can Walmart maintain momentum?

Walmart shares jumped sharply after the company's previous quarterly results, released in February, topped expectations, but they have since leveled off and traded mostly sideways for over a month. Nonetheless, the company remains a Wall Street favorite, with 25 of 28 analysts who follow the company currently rating the stock a "buy," according to TipRanks. Walmart shares are up about 16% year to date—almost 19% over the past 12 months—and remain near a record close of $61.45 posted in March.

Often viewed as an economic bellwether, Walmart's numbers and words will draw sharp scrutiny as usual. In February, Walmart's reported net income for the previous quarter fell almost 13% to $5.49 billion, even as comparable-store sales rose 4%. The company also forecast a 4% to 5% increase in net sales for the just-ended quarter. Analysts expect Walmart is earning about $0.52 per share in the quarter, based on a consensus figure from Nasdaq®.

Walmart executives may also offer observations on consumer spending habits. In a February interview with CNBC, Chief Financial Officer John David Rainey said Walmart customers had been showing discretion with their purchases in late 2023 and early 2024, putting fewer items in their carts but shopping more frequently.

Walmart operates more than 4,600 U.S. stores and is the largest U.S. food retailer, so it may be worth keeping eyes and ears open for any comments on food inflation and the company's grocery business.

Target's comeback gets tested

Target shares' 13% year-to-date advance may indicate Wall Street believes the company is putting the struggles of the past two years behind it. The company is scheduled to report results May 22.

In early May, Citigroup (C) upgraded Target to "buy" from "neutral," saying the company has emerged as "one of the winners within the retail landscape" with opportunity to improve margin in the years to come. 

Following a choppy 2022 and 2023, the company is "on the right track" with inventory well-controlled, easier sales comparisons beginning in the second quarter, and conservative guidance, according to Citigroup. The market may have reacted too negatively to some retailers amid a recently more uncertain consumer environment.

It remains to be seen if Target will deliver the kind of results investors want. In March, Target reported stronger-than-expected earnings and revenue for the holiday 2023 quarter even though comparable-store sales fell for the third quarter in a row. For the first quarter, Target said it expected a 3% to 5% decline in comparable-store sales and adjusted earnings per share of $1.70 to $2.10. 

Home improvement's dilemma: High rates, DIY fade

Shareholders in Home Depot as well as Lowe's (LOW) have had a pretty good year until around mid-March, when the stocks of both home improvement chains took sharp tumbles. Home Depot shares are down slightly more than 2% far this year, while Lowe's is up slightly more than 4%. Lowe's is scheduled to report results May 21.

Both companies' sales have been under pressure as the COVID-driven, do-it-yourself boom faded and high interest rates have continued to burden the housing market, with limited relief in sight. Federal Reserve leaders this spring have repeatedly said they need to see more evidence inflation is sustainably lower before reducing benchmark rates.

Home Depot earned $3.63 per share during the first quarter, a few cents above expectations, but revenue was $36.4 billion, slightly under Wall Street forecasts. Comparable-store sales in the United States fell 3.2%. CEO Ted Decker said the quarter was affected by "a delayed start to spring and continued softness in certain larger discretionary projects," according to a statement. 

Home Depot also reaffirmed its full-year guidance for a 1% decline in comparable-store sales and a 1% increase in total sales. 

Despite the earnings beat, Home Depot shares fell, and analysts remain skeptical over longer-term growth prospects.

"Given the maturity of the domestic home improvement industry, we expect demand to largely depend on changes in the real estate market, driven by prices, interest rates, turnover, and lending standards," a Morningstar analyst wrote in early May.

Express lane: Department stores, specialty retailers

Other retailers expected to report in coming weeks include department store chains like Kohl's, Macy's (M), and Nordstrom (JWN). Specialty retailers to watch for include Best Buy (BBY), Dick's Sporting Goods (DKS), Foot Locker, Ross Stores (ROST), Shoe Carnival (SCVL), The TJX Companies (TJX), and Williams-Sonoma (WSM).

Weren't interest rates supposed to be coming down by now?

Overall retail sales exceeded expectations during the first three months of the year but have recently shown signs of cooling. During April, retail sales excluding automobiles and gasoline rose 0.3% from March but fell 0.6% from year-earlier levels, the National Retail Federation (NRF) said in a May 9 report. 

The year-over-year decline may have been an anomaly because Easter fell in March this year, likely providing a Q1 boost, the NRF said. Last year's holiday was in April. For the first four months of 2024, total sales were up 1.8% from the same period in 2023.

But a certain budget-mindedness may be creeping in related to high rates and continued high balances on credit cards. Consumers did rein in credit card spending in March. Consumer credit rose at a 1.5% annual rate that month, down from 3.6% in February, according to a Federal Reserve report. But total revolving debt, which includes credit cards, still totaled a record $1.38 trillion in March, up more than 12% from the first quarter of 2023.

"Consumer spending continues to drive economic growth and retail sales increases, though we see some moderation in spending as consumers continually search for value," National Retail Federation President and CEO Matthew Shay said in a statement. "The ability to spend is supported by a growing job market and real gains in wages."

Still, overall inflation "remains stubborn because of elevated prices for services, while inflation for goods has dropped to nearly zero," Shay added. "Consumers remain focused on value and price and are shifting their spending patterns where needed to make ends meet."

On Wednesday, the Census Bureau is scheduled to report U.S. retail sales for April. Analysts expect overall sales to rise about 0.4% in April, slower than the 0.7% month-over-month gain in March.

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