Earnings preview: Walmart, Home Depot and Target

Walmart

Walmart report their third quarter earnings on Thursday 16 November, with shareholders hoping this retail giant will continue their enviable trend of outperforming market estimates. With less than 20% of the S&P 500 left to report, Walmart represent a major driver of market sentiment given the fact that their sales activity can act as a key barometer for US consumption. Behind Amazon, Walmart is the second largest retailer in the world, and there will be hope that the US retail sales strength seen over recent months will benefit this company as they seek to take advantage of strong demand and the possibility of raising margins in an inflationary environment.

Last quarter saw Walmart beat across the board, with food traffic growing 2.8% and online sales rising 2.3%. That move into digital sales will be key going forward, with traders keeping a close eye out for Q3 earnings from this growth segment of the business.  The ability of Walmart to deliver products at low cost should stand them in good stead in the face of rising prices, while it should be worth watching whether they can raise margins in the face of rising wage and transportation costs. International sales will be another key element, with the growth in online sales helping to drive underlying growth in this segment. With the company’s shares having reached a fresh record high earlier this month, will they manage to outperform expectations yet again to push the stock higher yet?

Home Depot

Home Depot continue the retail theme, with this high-street name focusing more on home improvement rather than Walmart’s supermarket, department store, and grocery style business. This focus on the DIY industry does raise questions on the health of the business at a time when we are seeing weakness in the housing sector. Higher interest rates have an obvious impact on house sales, while rising costs and lower affordability concerns could drive down demand for construction and renovation work. Consumer spending habits do point towards a strong demand for those seeking to maintain their quality of living, but there are questions around the willingness to also spend money on home improvements. The second quarter earnings saw CFO Richard McPhail note that consumers are holding back on those big-ticket discretionary purchases for now, with that theme unlikely to have changed three-months later.

Last quarter saw the firm post a 2% year-on-year decline, with investors keen to understand whether we will see a similarly discouraging theme play out for Q3. Their forecast signalled a similar 2-5% year-on-year decline for this quarter, with the outlook for Q4 likely to be key this time around. We will be watching out for any developments with regards to big purchases ahead of the key festive period. On a more positive tone, the company has seen transportation costs and supply bottlenecks ease, although it is unlikely that they will benefit from input price deflation per se. Keep an eye out for margins as prices settle somewhat from a particularly volatile period on the inflation front.

Target

Thursday promises to be a blockbuster day for the high-street names, with Target providing yet another key barometer for US consumption levels. This high-street favourite has experienced a number of bumps in the road of late, with increased theft losses coming alongside a deterioration in traffic, and signs of share loss in their general merchandise sales. There is a hope that Q4 will change things in terms of footfall, with Black Friday and Festive sales expected to pick-up.

With declining freight costs, investors will want to see improved margins in the third quarter. Meanwhile, an improved inventories position means they have been less inclined to sell products at a heavy discount. Nonetheless, the stock has several headwinds to contend with despite ongoing strength in US consumption. While year-on-year metrics are likely to be favourable after a particularly poor Q3 2022 report, the trend in earnings compared with 2021 does highlight a company that is struggling to grow post-covid.