Walmart issues cautious outlook as Fed rate hike sinks

Walmart said it expected sales growth to slow in the second half of this year, prompting the world’s biggest retailer to issue a cautious outlook for 2024 as it watches the impact of the aggressive campaign Federal Reserve to raise interest rates.

The company set sales and earnings forecasts below analysts’ expectations, even though it reported a strong fourth quarter in which bargain-hunting shoppers supported spending in December, which was the biggest record-breaking month of sales for Walmart’s U.S. operations.

“There’s just a lot we don’t know,” Walmart chief executive Doug McMillon told analysts on an earnings call Tuesday. “We could tip into a recession. We don’t know what happens to consumer spending. We don’t know what happens to layoffs (and) household incomes. And so given that it’s so early in the year and there’s a lot of unknowns right now, we’re just taking a cautious perspective.

Walmart executives said strong December sales in the United States were led by food, but that was partially offset by lower general merchandise sales. At its subsidiary Sam’s Club, management said positive sales trends during the fourth quarter for discretionary items such as apparel and merchandise were still holding in place as recently as the Super Bowl and Valentine’s Day.

Chief Financial Officer John Rainey said Walmart expected sales growth to be “strongest” in the first six months of this year and then moderate in the second half amid uncertain economic conditions.

“We haven’t been in a position where we’ve seen the Fed tighten that quickly. We’re seeing issues where delinquencies are going up and things like auto loans, you’ve got savings rates going down. And there’s has a lot of unknowns in the second half of the year.

Walmart’s gloomy outlook was echoed by Home Depot, which warned that its annual profits could fall for the first time since the financial crisis, amid high inflation and mortgage rates that blunt consumer demand for the home improvement.

Home Depot chief financial officer Richard McPhail said the DIY retailer predicted, like many economists, economic growth and flat consumer spending in 2023.

“Over the past seven quarters, we have seen our transactions gradually normalize as consumer spending shifts from goods to services,” he said. “If this change continues at its current rate, the home improvement market would be down in the mid-single digits.”

With more than three-quarters of a trillion dollars in annual sales between them, Walmart and Home Depot are often seen as barometers of the American consumer, with the latter more sensitive to the huge US housing market.

Shares of Walmart recouped early declines to close up 0.6% on Wall Street on Tuesday, while Home Depot fell more than 7%.

The advice from the two retail chains follows several weeks of stronger-than-expected U.S. economic data, including inflation, job growth and retail sales, which prompted markets to reevaluate their bets that the Federal Reserve would cut interest rates later this year in response to a likely slowdown in the US economy.

Following a hit jobs report, Fed Chairman Jay Powell warned earlier this month that interest rates may need to be raised higher than investors expected as the strength of the labor market meant that it could take longer for inflation to return to the central bank’s 2% target.

Walmart forecasts net sales growth of 2.5-3% for the current fiscal year, below Wall Street’s forecast for a 3.3% increase. It expects adjusted earnings of between $5.90 and $6.05 per share for 2024, missing analysts’ forecast of $6.50.

In the fourth quarter ended Jan. 31, net sales rose 7.3% from a year ago to $164 billion and diluted earnings jumped to $2.32 per share, both ahead on market forecasts.

Walmart said it expects to continue to profit from high-income shoppers, who are looking for discounts amid persistent inflation.

“We’re gaining market share across all income cohorts, including the top end, which is nearly half the gains we’ve seen in the US again this quarter,” McMillon said.

The Home Depot predicted fiscal 2024 revenue and comparable sales would be flat from a year ago, while diluted earnings per share would decline by “mid-single digits.”

That would mark the home improvement retailer’s weakest sales growth since its fiscal year 2010 and the first drop in annual profits since fiscal year 2009, according to Refinitiv data. Analysts expected slight growth.

“We’re seeing more price sensitivity,” chief executive Ted Decker told analysts on an earnings call on Tuesday, which was bigger in the fourth quarter than in the previous three months.

The bleak Home Depot forecast accompanied the company’s fourth-quarter sales and earnings that were slightly above and below Wall Street forecasts, respectively, and transaction volumes down 6% from a year ago. year.

“We are seeing a unique environment with many cross-currents at the moment. Obviously, there is increased inflation and rising interest rates. The tight labor market moderates equity in housing markets. So given all of that, we expect home improvement demand to moderate” this year, Decker said.

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