Company / Analytics

Analytics, 21 May 2021

What retail earnings show about the US Consumer

Leading U.S. retailers, including Walmart, Home Depot, Target, Lowe’s, and others reported first-quarter earnings that beat expectations this week, lifting the market. Retail appears to be alive and well, and so do consumers who have some purchasing power, thanks to stimulus checks. Retailers said consumers are buying items like luggage and teeth whitener as they travel and go to parties again. But they haven’t stopped investing in their homes yet, which was a trend that began last year.

Retail earnings

Ahead of retail earnings this week, many analysts expected to see the baton passed from big-box stay-at-home plays to specialty apparel and department stores. Instead, early figures from Walmart, Home Depot, and Macy’s showed that shoppers are just as likely to be finishing home improvement projects as they are to be buying luggage for their first post-pandemic trip.

Let’s first look at the earnings of select companies, before diving into what they indicate about the US economy and the American consumer.

Walmart Earnings

Walmart on Tuesday reported first-quarter earnings that surged past Wall Street’s estimates as the company reported strong grocery sales and e-commerce growth and raised its outlook for the year.

E-commerce sales in the U.S. rose by 37%, even as consumers returned to more typical patterns. The retailer faced tough comparisons to the year-ago quarter, a time when shelter-in-place orders prompted customers to stock up on food and household items and make more purchases online. The retailer said more shoppers have headed to its stores and website to spend stimulus checks and to get ready to socialize again as Covid cases decline and vaccination rates rise.

In the fiscal first quarter ended April 30, adjusted earnings per share were $1.69, against analyst expectations of $1.21. On the other hand, revenue was $138.31 billion vs. $131.97 billion analysts expected.

Net income rose to $2.73 billion, or 97 cents per share, from $3.99 billion, or $1.40 per share, a year earlier. Excluding items, the company earned $1.69 per share. Analysts were expecting Walmart would earn $1.21 per share, according to Refinitiv. Total revenue grew by nearly 3% to $138.31 billion from $134.62 billion a year earlier, exceeding Wall Street’s expectations of $131.97 billion. Walmart International’s net sales were $27.3 billion, a drop of 8.3% year over year, partially due to the company divesting parts of its global business. Its e-commerce sales increased by 49% in that segment, however. The company recently sold Asda, a British supermarket chain, and the majority stake of Seiyu, a Japanese supermarket chain.

The company also raised its guidance for the fiscal year. Shares closed Tuesday up 2.2% to $141.91.

Home Depot earnings

Like Walmart, Home Depot crushed Wall Street’s expectations as consumers’ splurging on their homes lingers more than a year into the coronavirus pandemic. In the three months ended May 2, the company reported earnings per share of $3.86 vs. $3.08 analysts expected. Revenue was $37.5 billion against $34.96 billion analysts expected.

Meanwhile, net income was $4.15 billion, or $3.86 per share, up from $2.25 billion, or $2.08 per share, a year earlier. Analysts expected earnings per share of $3.08. Net sales rose 32.7% to $37.5 billion, beating expectations of $34.96 billion. Global same-store sales surged 31% for the quarter, and paint was the only category to see same-store sales growth of less than 20%. Online sales grew by 27%. More than half of digital orders were fulfilled through stores.

A booming housing market has helped fuel growth, although soaring lumber prices and higher interest rates have dampened sales of newly built homes in recent months. For the company’s first-quarter this year, it reported 447.2 million customer transactions, up 19.3% from a year earlier. Consumers were also spending more during their visits. The average ticket rose 10.3% to $82.37.

Some of that increase in consumer spending could be tied to higher prices. For example, the price for a sheet of oriented strand board lumber has quadrupled over the last year, according to executives, but demand has kept pace. Home Depot hasn’t released an outlook for fiscal 2021. Last quarter, it cited the uncertainty caused by the pandemic.

Shares of Home Depot rose more than 2% in premarket trading but closed down 1%. The stock has risen 19% this year, giving it a market value of $341 billion.

Target Earnings

Like Walmart, Home Depot, Macy’s, and others, Target said it is benefiting from the reopening economy and busier social calendars, which are prompting consumers to shop.

Target said Wednesday fiscal first-quarter sales rose 23%, as investments it made in exclusive brands and services like curbside pickup strengthened customer loyalty and kept them coming back.

In the fiscal first quarter ended May 1, Target reported adjusted earnings per share of $3.69 against the $2.25 analysts expected. Revenue was $24.20 billion vs. analyst expectations of $21.81 billion. Meanwhile, net income jumped to $2.1 billion, or $4.17 per share, from $284 million, or 56 cents per share, a year earlier. Excluding items, the retailer earned $3.69 per share, higher than the $2.25 per share expected by analysts surveyed by Refinitiv.

Target said it is benefiting from rising vaccination rates, a reopening economy, and busier social calendars: Customers gravitated to new merchandise, especially clothes. Some returned to browsing again inside of stores. Buoyed by this confidence, Target offered a second-quarter forecast that was well above Wall Street’s expectations, despite facing tough year-over-year comparisons. Shares touched a 52-week high of $219.82 on Wednesday. They closed the day up about 6% to $219.01.

What the earnings say about the US economy

The healthy retail earnings reports aren’t too shocking when you consider some of the economic data from Q1, especially retail sales. What might be surprising, however, is that shares of retail companies gained ground ahead of the open. That wasn’t set in stone considering how many times this quarter we’ve seen strong earnings followed by investors selling shares, though that’s been more of a Tech phenomenon than any other sector.

For the 64.7% of the Retail sector companies in the S&P 500 index that have reported Q1 results, total earnings and revenues are up +61.2% and +12.7%, respectively, with 90.9% beating EPS estimates and 81.8% beating top-line estimates as of Wednesday, May 19. This is a notably better experience than we have seen from the group, even after accounting for Amazon’s blockbuster results.

Retailers’ first-quarter results were helped by continued economic stimulus—retail sales were up 51.2%. in April year over year—amid an economy that is rapidly recovering from the coronavirus pandemic. Over the last few months, the rollout of vaccines and the easing of capacity rules and mask restrictions have finally given people reason to venture out of their homes. And to do that, they need stuff—especially if they find their pre-pandemic apparel fits a little snugger than it did before.

Consumers also had more cash in their pockets, thanks to stimulus checks from the federal government. However, executives said that it was too difficult to quantify the checks, most of which were sent to consumers in March.

Economic growth is expected to get even stronger as other real-time indicators like restaurant reservations, foot traffic, and employment costs all point to continued gains ahead. This is despite the weaker-than-expected April jobs report showed that nonfarm payrolls grew by just 266,000 in a month that forecasters had expected to see 1 million.

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