Home Depot And Walmart Are Preparing For A Slowdown In Consumer Spending

There is no better indication of how this year is going to be for the retail industry than Walmart's cautious outlook for the year ahead.

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Despite exceeding expectations for the holiday quarter on Tuesday, the discounter provided a weaker-than-expected outlook for the year. Home Depot provided similar guidance. As stubborn inflation and climbing interest rates force consumers to watch their spending, the home improvement retailer is planning flat same-store sales for the fourth quarter.

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Shares of Home Depot dropped Tuesday morning, while Walmart's were effectively flat, as they foreshadowed a major theme emerging in the market: Consumers are becoming more difficult to sell to.

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Walmart is experiencing a shift in customer behavior, which means that shoppers are purchasing more necessities, such as groceries and lightbulbs, rather than big-ticket items or discretionary products, such as electronics and home decor. There is a possibility that customers may delay a home improvement project or choose to purchase cheaper floor tiles or appliances for their kitchens at Home Depot.

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Chief Financial Officer at Home Depot, Richard McPhail, said the higher prices of groceries and other items are influencing the decisions of customers.

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“In the midst of persistent inflation, we have seen an increasing degree of price sensitivity as the year has progressed, which is similar to what we were expecting,” McPhail said to Trade Algo.

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John David Rainey, Walmart's CFO, said that the company has taken the challenges of the year into account when forecasting its full-year earnings. A number of factors contributed to this, such as the Federal Reserve's interest rate increases and consumers' lower savings rates, and shakier balance sheets.

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“We find ourselves in a similar situation to what we have been in for several years, where there are a lot of unknowns, as there have been for the last several years,” he said during a call with Trade Algo.

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Walmart and Home Depot’s advantages

A Walmart executive on an investor call described food inflation as "the most stubborn of all the categories." He said Walmart expects this shift away from higher-margin general merchandise goods and toward lower-margin categories such as food to "get a little bit worse" over the next couple of months.

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Doug McMillon, Walmart's CEO, said on an investor call that the big-box retailer is in a fortunate position regardless of economic conditions. There is no risk involved in the business, which sells everything from toothpaste to furniture since it is "naturally hedged."

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"If the customers want more of something and less of something else, then we shift our inventory to meet their needs," he said. "If the economy is doing well, our customers have more money to spend, and that is great for us. Conversely, if things are tougher, they turn to us for value."

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During its first year, it has picked up customers across a wide range of income levels - including those who make more than $100,000 - at Sam's Club and Walmart's SuperCenters, he said. Its grocery business accounts for nearly 60% of its annual revenue, a category that drives foot traffic to its store and is recession-proof.

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In addition, as they shop at Walmart's stores or use the company's curbside pickup and delivery services, Walmart hopes it will “result in them choosing us, even as inflation eventually subsides.”

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McPhail, the director of marketing at Home Depot, said that the company's typical customers are homeowners who have stable jobs and are financially sound. Aside from this, he said, many people are deciding to repair their existing homes rather than purchase new ones in the wake of rising mortgage rates.

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Is there another dynamic that Home Depot could use to its advantage? Among the items that this store sells are items that people may think are necessities, such as supplies for repairing a broken water heater or the replacement of a washer and dryer that may be required by a family.

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There is a good chance that other retailers are in a tougher position than you are. The majority of mall players, such as Macy's and Nordstrom, tend to cater primarily to discretionary goods like apparel, handbags, and shoes. Both of these companies have already warned investors about the results of their holiday season. There will be a fourth-quarter earnings report from both companies next week.