Retailers Start Ringing Up Q4 Results

February 15, 2024
Walmart leads the way as major retailers start weighing in on a positive year for consumer spending. But will it hold true as individual companies report results?

Solid holiday sales numbers were a gift to investors in the largest U.S. brick-and-mortar retailers like Costco Wholesale (COST), Target (TGT), and Walmart (WMT). But the only data investors have had to measure the success so far are industrywide numbers.

Now it's time for the merchants to weigh in on their individual performance. The unofficial start to the fourth-quarter retail earnings season begins before Tuesday's opening bell as Walmart, the biggest U.S. retailer, and home improvement leader Home Depot (HD) are scheduled to report.

Investors may be experiencing a case of whiplash from broad retail sales numbers in recent months. The Census Bureau's initial estimate for December retail sales posted an unexpectedly strong 0.6% monthly gain. Then, earlier today, the bureau said January sales tumbled 0.8%, far worse than the 0.2% decline analysts expected. December sales were also revised lower to a 0.4% monthly gain.

While expectations for record holiday sales helped lift many retailers' gains in recent months, today's surprisingly weak sales may cast a cloud over retailer earnings amid concern consumers may be pulling back. Investors will likely want to know how those numbers connect to the reality retail executives are seeing in-store and online now that we've reached the middle of the first quarter. 

Any sustained slowdown in consumer spending could make it difficult for shares of many retailers to extend last year's firm performance. In 2023, a subsector of the S&P 500® index (SPX) that includes companies like Costco and Walmart posted an 18.2% increase, according to Sam Stovall, chief investment strategist of CFRA. That's not far behind the 24% surge in the overall S&P 500 index. 

Through mid-February, shares for companies in the Consumer Staples Merchandise Retail subsector were up 6.3%, which ranked the group in the top dozen among approximately 125 subsectors tracked by CFRA. The overall market, based on the S&P 500, was up 4.2% for the year through February 14.

Strong holidays carrying over?

"Consumers appear to be gaining confidence, and it seems that after strong holidays, they're still in a spending mood," Stovall said. "That reflects a number of dynamics, including strong employment data, lower inflation, and hopes we avoid recession."

A strong holiday season is always critical for retailers. Core retail sales during the 2023 holidays reached a record $964.4 billion, up 3.8% from 2022, according to the National Retail Federation (NRF), citing U.S. Census Bureau data. Retail sales for all of 2023 rose 3.6% over 2022 to a record $5.13 trillion.

"Consumer spending was remarkably resilient throughout 2023 and finished the year with a solid pace for the holiday season," NRF Chief Economist Jack Kleinhenz said in a statement. "Although inflation has been the biggest concern for households, the price of goods eased notably and was helped by a healthy labor market, underscoring a successful holiday season for retailers."

Inflation, debt headwinds

But as retailers report, it's worth considering whether holiday season strength may have already been baked into companies' share prices given the gains of the past few months. That puts the onus on stores to not only hit or exceed Wall Street targets, but also convince investors that shoppers will continue to make the cash registers go ka-ching the rest of the year. 

There remain at least a few headwinds and potential pitfalls for both retailers and consumers ahead. With unemployment holding under 4%, most working-age U.S. adults who want a job have one. But they're also inflation-weary. While inflation has steadily declined for more than a year, prices for many essentials, especially food, remain above pre-pandemic levels. 

And while historically high interest rates and still-elevated inflation didn't appear to deter consumers last year, U.S. consumers also started the new year with heavy revolving debt and appeared to be having increasing difficulty keeping those bills paid. According to the New York Federal Reserve, credit card debt in "serious delinquency" (90 days or more past due) in the fourth quarter totaled $1.13 trillion, or 6.4% of total credit card debt and up nearly 60% from the same quarter in 2022.

Whether such pressures prompt large numbers of consumers to take certain steps—for example, curtail purchases of discretionary items, such as appliances, furniture, and vacations, in favor of non-discretionary things like food and fuel—remains to be seen.

As fourth-quarter retail earnings commence, investors may want to keep an eye on key topics like executives' views about consumer spending and interest rates and how companies are dealing with any declines in in-store sales, among other subjects.

Can Walmart extend its bounce back?

Walmart's previous quarterly report, in mid-November, looked pretty solid at first blush. The company reported a 5.2% increase in revenue to $160.8 billion, net income of $453 million, and a 4.9% jump in comparable-store sales. 

Nonetheless, investors seized instead on comments from company executives who said they were thinking "slightly more cautiously about the consumer" than they were three months prior. Those remarks helped send Walmart shares reeling more than 8% after the market opened that day. 

Walmart shares have since recovered and then some, touching a record high in early February. The stock is one of the top-performing retailer shares so far in 2024, up 6.7% through February 14 at around $168. But investors should go into Walmart's earnings February 20 with eyes and ears wide open to find out if CEO Doug McMillon has changed his tune on the state of the consumer.

Walmart is also the largest U.S. food retailer, so it's worth checking the company's results and listening to the earnings call for any elaboration on the grocery business—particularly about food inflation and how that may be affecting its customers.

Walmart's results could help set the tone for the rest of retail earnings, especially those for other big-box chains, such as Costco and Target, as well as smaller discounters, such as Big Lots (BIG), Dollar General (DG), and Dollar Tree (DLTR). 

Target and Costco are expected to report quarterly results March 5 and March 7, respectfully (the other four previously mentioned companies haven't announced earnings release dates yet).

Circling back with Target

Target shares spent much of 2023 in Wall Street's doghouse, dropping as much as 30% to just under $103, the lowest level in more than three years, as sales slumped and some of its stores were hit by what company management referred to as organized retail crime. In Target's third-quarter earnings reported in November, comparable-store sales dropped nearly 5%, reflecting consumers trimming discretionary purchases.

But the third-quarter report actually sparked a rally for Target because it revealed better-than-expected earnings and revenue, which the company attributed to fall apparel for women and new kitchenware and jewelry brands. The share rally extended into 2024, with the stock gaining more than 35% from a November low to reach a nine-month high of $150.40 by mid-February.

Whether Target can shore up eroding comparable-store sales trends is sure to be one of many key questions on investors' minds, and executives' assessments of consumer spending will also be of interest.

Can Home Depot nail it?

For Home Depot, lackluster quarterly results and a cautious outlook didn't hurt the retailer's shares. The stock, also part of the Dow, has gained 32% since late October and touched a two-year high in early February. Last quarter, Home Depot said its net earnings fell nearly 12% to $3.8 billion while U.S. comparable-store sales shrank 3.5%.

As with his Walmart counterpart, Home Depot CEO Ted Decker's assessments or color on consumer spending habits, as well as his outlook for the spring and summer building season, will be worth listening for. 

Interest rates and the health of the housing market are also critical for Home Depot and other home improvement chains, including Lowe's (LOW), which is expected to report February 27. The recent climb in mortgage rates back above 7% and the Federal Reserve's suggestion that it won't be lowering benchmark rates any time soon likely has the attention of Home Depot management and shareholders. 

Meanwhile, investors who follow home improvement retailers may want to listen for January's housing starts and related homebuilding data arriving tomorrow.

Department and specialty retailer results ahead

Many other retailers will report in the coming weeks. The department store category features Kohl's (KSS), Macy's (M), and Nordstrom (JWN), as well as those that specialize in apparel, athletic shoes, electronics, or something else. Those include Best Buy (BBY), Dick's Sporting Goods (DKS), Foot Locker (FL), Ross Stores (ROST), Shoe Carnival (SCVL), The TJX Companies (TJX), and Williams-Sonoma (WSM).

Best Buy, whose shares are down about 6% so far this year and down about 17% over the past 12 months, is scheduled to report fourth-quarter results February 29. In November, the electronics retailer reported a 7.8% decline in third-quarter year-over-year revenue and a 7.3% drop in comparable-store sales. The company also reduced its guidance for fourth-quarter revenue and forecast a 3% to 7% decline in comparable-store sales.

Dick's Sporting Goods is faring better, having seen its shares gain 28% over the past 12 months and post a record high earlier in February. In November, the company reported a 3.8% increase in quarterly revenue and said comparable-store sales rose 1.6% while also boosting its full-year forecast for the same metric.

Macy's shares joined in the late-2023 retail resurgence, gaining 77% since mid-November through mid-February. But the storied department store chain faces a much murkier outlook than many peers. The company in recent months announced plans to close some stores and also turned down an unsolicited takeover bid. In the third quarter, Macy's said comparable-store sales tumbled 7.6%; for the full year, Macy's projected a 7% decline.

In January, Macy's rejected a $5.8 billion takeover proposal from investment firms Arkhouse Management and Brigade Capital Management that would've taken the retailer private. Any comments from Macy's executives on that proposal will be of keen investor interest.

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