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Retail Earnings Provide Insight on Consumer Economy

Investors looking for less risky alternatives to high-growth tech stocks might want to watch the retail sector as the world emerges from the worst of the pandemic to date.

The sector’s recent earnings reports reveal a divergent group. Some firms opted to bite the bullet and take inventory related charges to clear stock. Others are trying to reduce inventory more slowly, hoping to salvage some profit.

Generally speaking: Home Depot and Lowe’s were strong, Walmart and Target were mixed and discretionary names suffered.

Walmart and Target said inflation boosted sales but hurt profitability, inventories and family finances. That seems like the clear takeaway after this quarter of earnings.

Consumer retail spending accounts for two-thirds of US economic activity. Recent retailer earnings provide a snapshot of consumer sentiment and reveal which firms’ post-pandemic strategies bore fruit.

Here’s a look at recent retail sector earnings reports.

General Consumer

Walmart (US:WMT) reported weaker year over year earnings on August 16th, but it grew revenue by 8.6% above a year ago. The company tweaked its outlook a tad higher and expected full-year earnings to fall “just” 9% to 11% vs. a prior outlook calling for an 11% to 13% decline.

Walmart cut its guidance in May and again in July, preparing the market for grim news.

Target (US:TGT) missed Wall Street’s top- and bottom-line estimates on anemic 3.5% revenue growth. Target’s earnings per share fell 89% versus a year ago, to 39 cents. It missed its analyst earnings target by 33 cents a share.

Inventories remain an issue as stockpiles at both companies grew about 33% versus a year ago. The discounting needed to clear that merchandise hurts both retailers.

Walmart CEO Doug McMillon said, “The actions we’ve taken to improve inventory levels in the U.S., along with a heavier mix of sales in grocery, put pressure on the profit margin for Q2 and our outlook for the year.” He added that: “Our sales were well ahead of plan, with inflation lifting our average transaction size, but we know that the amount and persistence of inflation are negatively affecting many families.”

For retailers, inflation pressures margins while consumers focus on “needs-based” purchases.

Both retailers noted strong food sales amid soarin inflation.

Dollar stores like Dollar General (US:DG) and Dollar Tree (US:DLTR) reported mixed results, and the former sounded a downbeat note.

“We expect the combination of this pricing investment at Family Dollar and the shoppers’ heightened focus on needs-based consumable products will pressure gross margins in the back half of the year.”

Dollar General was more sanguine, hiking its sales estimate but not its earnings outlook, implying continued margin pressure.

Home Improvement

Many investors consider the fourth quarter the “holiday quarter” for retailers. For most retailers, that proves to be true. While Home Depot (US:HD) and Lowe’s (NYSE:LOW) do well during the fourth quarter, the companies’ best stretch is actually in the second quarter.

Home Depot grew earnings by 11.5%, Lowe’s grew earnings by 9.9%, and both retailers grew sales by 5.5%, respectively. Oppenheimer analysts said Lowe’s results were weaker than Home Depot’s but that the “home improvement consumer is holding up quite well.”

Home Depot CEO and president Ted Decker added: “In the second quarter, we delivered the highest quarterly sales and earnings in our company’s history.”

Inventories rose 38% over last year at Home Depot and 11.6% at rival Lowe’s.

Lowe’s Executive VP of Merchandising, Bill Boltz, said, “Our disciplined planning process enabled us to mitigate many of the inventory pressures you’re seeing across the retail industry.”

Why the large discrepancy? Home Depot said that roughly half the inventory increase “reflects product cost inflation.” At the same time, the rest is deliberate “pull forward” and increased investments going into the second half of the year.

While not immune to the macro environment, spending remains strong on home improvement.

Discretionary Shopping

TJX Companies (US:TJX) saw revenue fall 7.5% year over year in the most recent quarter. Worse, it provided a below-consensus revenue estimate for the third quarter and cut its full-year revenue outlook from a prior midpoint of $51.55 billion down to $49.75 billion, a 3.5% reduction and suggesting 2.5% year-over-year growth.

Kohl’s (US:KSS) beat earnings and revenue estimates, but they fell 55% and 8% YoY, respectively. Worse, Kohl’s slashed full-year guidance for both earnings and revenue. Rather than expecting roughly flat growth, the retailer expects sales to fall 5% to 6%.

Lastly, there’s Nordstrom (US:JWN). The retailer grew revenue 12% year over year to $4.1 billion, but like the others, it cut its full-year revenue and earnings outlook. Luckily for Nordstrom, it still expects 5% to 7% growth. However, its earnings forecast now calls for EPS of $2.30 to $2.60 a share vs. consensus estimates of $3.12 a share and a prior outlook of $3.20 to $3.50 a share.

The consumer is making cutbacks as they prioritize their spending on needs vs. wants.

The labor market remains strong (even though the White House expects it to cool), and consumer spending remains resilient.

However, consumers are being pinched right now due to inflation. They’re still spending, but there’s only so much money to go around once consumers have paid their bills, filled their gas tanks and bought groceries. They continue to spend on necessary items and invest in their homes but are making cutbacks in discretionary purchases.

This article originally appeared on Fintel

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