Home Depot (HD) and Walmart (WMT) are among the largest US retailers whose results seem to show the attitude of the average American consumer towards spending money. HD is a chain of large-format home improvement shops, very similar to Europe's Leroy Merlin. WMT, on the other hand, is the largest US retail chain.
Last month, Walmart spooked markets by lowering its profit forecasts and warned of a rapid decline in demand. However, the results announced today said sales were up more than 8% year-on-year to $152.9 billion against expectations of $150.8 billion. Online sales alone rose by as much as 12%.
The company is struggling with a gigantic inventory problem (worth $61 billion at the end of Q1), prominent among the backlog of products is apparel, for example. To deal with this, discounts have been introduced on many products, thereby boosting sales by stimulating demand. At present, the value of stock amounts to USD 59.9 billion.
However, the increased sales do not translate directly into profits. "The actions we’ve taken to improve inventory levels in the US, along with a heavier mix of sales in grocery, put pressure on the profit margin for Q2 and our outlook for the year," - CEO Doug McMillon said.
Walmart's second-quarter net income rose to $5.15bn, or $1.77 per share (EPS) against Wall Street analysts' estimates of $1.62. In the same period a year ago, net income was $4.28bn, or $1.52 per share (EPS).
Walmart maintained its forecast for the second half of the year. It expects US shop sales to grow by about 3% (excluding fuel), in the second half of the year, or about 4 per cent for the full year. It expects adjusted earnings per share to decline 9% for the year.
Home Depot also announced a 5.8% increase in sales, to 43.8 billion against expectations of $43.36 billion. Net sales were up 6.5% year-over-year, marking the highest quarterly sales in the company's history.
"Our team has done a fantastic job serving our customers while continuing to navigate a challenging and dynamic environment," - CEO Ted Decker said, commenting on the company's results.
Net income increased to $5.17 billion, up 7.6% year-over-year. EPS was $5.05 against analysts' forecasts of $4.94.
Walmart and Home Depot gain 4.7% and 1.9%, respectively, on the market open.
The retailers' results show that, despite the looming recession, consumers are spending money and the situation could be not that bad in the short term. However, at the same time, the figures for financing this spending are alarming. A large proportion of Americans are covering higher prices with credit cards, which must eventually be repaid, according to data published by Bloomberg. The worsening outlook for economic health, alarming PMI levels and the bond yield curve all translate into possible future deterioration in consumer health.
Rafał Tworkowski, Junior Market Analyst, Conotoxia Ltd. (Conotoxia investment service)
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