While many traders are rightfully fixated upon the potential effects of tomorrow afternoon’s report from Nvidia (NVDA), it is important to remember that despite technology stocks’ dominance in major indices, the consumers represent about 2/3 of the US economy. Two of the most important places where consumers spend their money are of course, Walmart (WMT) and Home Depot (HD). Even as WMT rallies smartly and HD recovers from early losses, it is not clear that we can glean all that much about the health of the US consumer from their earnings.
Last week’s economic data gave an unfavorable view about consumer spending. Retail sales, whether measured in the aggregate, ex-autos, ex-autos and gas, and the control group, all fell on a monthly basis and all missed their consensus estimates. The implication was that people were becoming more cautious about spending, at least during January. Government reports, however, tell a macro story. Corporate earnings tell a micro story. While there were certainly some encouraging reports today, it is still difficult to say that consumer activity belies the economic stats.
When HD came out this morning, the stock fell a quick 4% (it is currently unchanged as I write this). By reporting EPS of $2.82, HD was able to beat the analyst consensus of $2.77, but it is useful to note that on a year-over-year basis the company has shown neither revenue nor earnings growth for a year. This is certainly not a positive for any company, though some of the reasons are quite obvious. Management cited declining interest in major renovations as a factor. People tend to renovate their homes either when they believe that the expenditure will boost the value of their dwelling or after they have relocated. Higher interest rates have slowed the housing market, which in turn is a negative influence upon both of those factors. Although HD had a nice run over the past few months, it remains about 10% below its highs of late 2021, undoubtedly because of rates and housing. It is difficult to draw too many conclusions about the overall health of the consumer strictly from HD’s outcome.
On the surface, WMT’s ability to report EPS of $1.80 when $1.65 was expected, tells a highly positive story. Investors have been paying a premium for stocks that can deliver solid revenues and profits, and WMT definitely fits that bill. Investors also relished the prospect of an 9% dividend increase. Even though stocks with no or low dividends have been in the forefront, it is impossible to ignore the positive message sent when management raises its dividends. Boards are loath to cut dividends, so a substantial raise sends a highly positive message about a company’s ability to support the payouts. The positive quarter and dividend hike allowed investors to largely overlook the curiously lower full-year guidance, which implies that current analysts’ estimates are near the high end of the corporate guidance. Combine the positives with an impending 3:1 split, and we get a 5% jump in WMT to all-time highs.
Unfortunately, there is a nagging concern about the health of the consumer that might be reflected in WMT’s results. It is entirely possible that WMT is benefiting from consumers’ nervousness. When times are tough, customers seek value, and shopping at WMT has long been considered a value proposition. The company has always been committed to low prices, even if the in-store experience can be less than wonderful. In an economy where credit card debt is at an all-time high and the average credit card’s interest rate exceeds 21%, a stretched consumer – particularly those with middle- and lower incomes – need to seek value and low prices.
Thus, it is entirely possible that WMT’s success comes at the expense of competitors like Target (TGT), Kohl’s (KSS) and others. Under tough economic circumstances, people frequently “trade down” to WMT from pricier alternatives, and we won’t know for sure whether or not that is occurring until other retailers report earnings in the coming days and weeks. It is more than fair to look at today’s report from WMT as being a real positive for that company. But it may be premature to assume that WMT’s success is reflective of a truly healthy consumer. It may actually be revealing quite the opposite.
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