WMT.US

Lurking behind strong recent performance for U.S. retail giants is concern that consumers will cut their spending in the current monetary tightening cycle

 

By Bantang Qubing

The U.S. Commerce Department announced last month that retail sales fell 0.4% in February month-on-month, a clear reversal from the 3.2% growth in January, rekindling investor concerns about the health of the country’s retail sector. For a better picture of how the industry has fared this year, we can look at the conservative projections in Walmart’s (WMT.US) latest annual report.

The U.S. retailing bellwether’s revenue grew 6.7% last year to $611.3 billion despite operating in the shadow of the Covid pandemic, winning plaudits from the market. But the company’s grim projections about its slowing sales and profit growth in the new year quickly rained on any positive sentiment.

What prompted the biggest U.S. retailer to issue such a warning despite its otherwise decent performance? Are there hidden concerns behind its strong revenue? To get a better sense of how current Fed policies are affecting the U.S. consumer market, we can look at how foreign media interpreted the Walmart forecast.

According an Economist article headlined “A warning from Walmart about the health of the American consumer,” U.S. consumers have not made a deliberate decision to rein in their spending. Data showed that Walmart’s same-store sales grew by 8.3% in last year’s fourth quarter year-on-year, and its share of the U.S. retail market has continued to grow and exceed market expectations.

That said, growing sales aren’t always good news. After examining all market segments, the article revealed that one important factor behind Walmart’s strong gains in the grocery market was high U.S. inflation. Local consumers, including high-income households, are choosing discount chains like Walmart to save money, which drove the company’s sales growth.

Buying essentials

What’s more, sales of high-margin non-essential goods like toys, clothing and household items are slowing, which suggests that consumers are becoming cautious with their discretionary spending and veering towards more essential items like food and other perishable goods. Walmart warned that such conditions would continue into this year, taking a toll on its profit margins.

Meanwhile, misguided rosy projections by many retailers previously led to high inventory levels, forcing companies like Walmart to sell a lot of goods at big discounts last year to clear out that inventory. Such inventory clearing through price cuts paid off to some extent and brought Walmart’s U.S. inventory levels down by 2.6% in last year’s fourth quarter.

All that might provide some important context for Walmart’s cautiousness. Walmart’s strong performance came on top of realities and practical headwinds that need to be factored in.

Walmart isn’t the only one being cautious. Home improvements chain Home Depot (HD.US) has published similar early warnings, and expects to see its sales this year on par with 2022.

Against a backdrop of high inflation, shifting consumer behavior and a slowdown in the U.S. real estate market, the company’s sales in last year’s fourth quarter grew by just 0.3% year-on-year. Even more disappointing, the company’s annual transaction volume declined for a seventh consecutive year.

Home Depot’s CFO explained that stubbornly high inflation was causing consumers to become increasingly price-sensitive, which probably led many to hold off on household renovations or to choose cheaper floor tiles and kitchen wares instead.

Meanwhile, the company also announced spending an additional $1 billion on higher employee pay. Walmart also previously said it would raise its minimum hourly wage to $14 from $12 in order to retain employees complaining of low wages in the current tight labor market. As retailer profits come under pressure from salary increases and inflation causes their core low-income customers to continue reining in spending, we might expect to see weaker retail sales this year.

Big retailers like Home Depot and Walmart crowed about their pricing power last year, but now are becoming more cautious with their price hikes to risk putting off consumers. If even industry leaders are feeling the pinch, then you can imagine what small- and medium-sized retailers, which have far less say in the market, must be going through.

This year is shaping up to be one of the most challenging for U.S. retailers, as they face a double-whammy of declining revenue and cost increases. As inflation is expected to come down gradually with more interest rate hikes, the market is closely watching to see how future changes in consumer behavior might affect these companies.

This article was originally published by Research-Select, a research sharing platform for buy-side investors. You can view the original at here and reach the author at maifangyanxuan@163.com

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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