Walmart and Home Depot ease recession fears even as inflation persists

Two of the largest U.S. retailers eased fears of a recession, reporting resilient consumer spending even as high food and fuel inflation weighs heavily on their customers.

Walmart, the world’s largest retailer, said it has seen glimmers of improvement in recent weeks despite its most price-sensitive shoppers switching to cheaper groceries. Home Depot, the DIY chain, said home improvement spending had been “incredibly high” as its business accelerated in recent weeks.

Two profit warnings from Walmart since May had rattled investors looking for clues about how U.S. consumers have adjusted to historically high inflation and rising interest rates.

But the retailer reported higher-than-expected sales and profits in the three months to July on Tuesday and forecast a lower full-year profit decline than it had warned investors there. just three weeks ago.

“We ended the quarter on a high note,” said John David Rainey, Walmart’s new chief financial officer. Traffic to stores picked up in July and August, he added, and the back-to-school season was “off to a good start”.

Home Depot reported its highest ever quarterly sales and profit, saying consumers were spending on home improvements despite high inflation and mortgage rates.

Chief executive Ted Decker told analysts on Tuesday there were still many “cross-currents” in the U.S. economy, but savings rates, the labor market and wage growth remained. solid.

Walmart’s reported earnings of $1.88 per share for its fiscal second quarter rose 23% year-on-year and beat analysts’ consensus estimate of $1.62 per share.

However, after an 8.4% increase in revenue to $153 billion, the figures show the effect of inflationary pressures on Walmart consumers, many of whom cut spending on clothing and general merchandise as their bills dropped. gas and groceries increased.

Low-income consumers were switching from deli meats to cheaper hot dogs, canned tuna and chicken, Rainey said. However, Walmart chief executive Doug McMillon added that the company was gaining market share as high-income shoppers turned to its stores and e-commerce services to save money.

As he warned in July, inflation-induced changes in consumer spending have left Walmart with excess inventory, particularly in apparel. Markdowns to clear this stock contributed to a 132 basis point decline in its gross profit margin in the quarter.

Walmart’s inventory hit $60 billion at the end of July, up 25% year on year, in part due to inflation and efforts to avoid the “skinny” inventory position at which she faced during the holiday period last year.

Rainey said Walmart has liquidated most of its summer seasonal inventory, but still has excess inventory of electronics, home and sporting goods.

Walmart now expects a 9-11% drop in full-year operating profit, down from its forecast last month that investors should expect an 11-11% decline. 13%.

This outlook was based on Walmart’s expectation that the consumer environment in the third and fourth quarters of the fiscal year “would be much like [the second quarter]said McMillon.

Investors welcomed improved prospects for two of America’s biggest retailers, pushing Walmart shares up 5.1% and Home Depot shares 4.1% on Tuesday.

The upbeat mood boosted shares of industry peers. Retailer Target and DIY chain Lowe’s, which report earnings on Wednesday morning, rose 4.6% and 2.9% respectively.

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