Home Depot And Walmart Are The Miners In The Economic Coal Pit

The dismal forecast provided by Walmart and Home Depot on Tuesday signaled that the retailers anticipate a decline in consumer spending in 2023, setting the tone for the upcoming retail earnings season.

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The two retailers have long been considered bellwethers for consumer health due to their size and scope, with Walmart WMT -0.81% in particular serving as the largest firm in the world by revenue. Even while the duo ended the year with a few victories, including exceeding fourth-quarter earnings per share projections, there were some negative developments.

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Investors have been intensely focused on the retailers' forecast, as observed by Trade Algo, and for both Walmart and Home Depot HD +0.78%, the prognosis was worse than anticipated. Walmart's fiscal 2024 earnings forecast fell short of expectations. Home Depot predicted that in fiscal 2023, earnings will fall by a mid-single-digit percentage, falling short of expectations that they would flatten.

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The retailers blamed their pessimistic view on the unknown viability of consumer spending in the face of tightening economic conditions.

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John David Rainey, CFO at Walmart, said: "We might tip into a recession." "What happens to consumer spending is unknown. Given that it's still early in the year and there are a lot of unknowns, we're simply taking a cautious stance about layoffs and household income.

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It is simple to understand why even two of America's biggest retailers are finding it difficult to manage customers. For the past few months, the economy has been sending out a number of contradictory signals. For instance, despite an increase in layoffs, consumer spending is still strong, with retail sales up 3% in January—nearly twice what experts had projected. Although more slowly, wage growth is still occurring, and unemployment rates are still quite low. Inflation is still high, savings are starting to disappear, and credit card debt is gradually increasing.

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According to Katie Thomas, who oversees the Kearney Consumer Institute, an internal think tank at the consulting firm Kearney, consumers will start to cut down on their spending a little. Nevertheless, Thomas is unsure of how simple it will be to identify this trend.

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The cautious stance taken by the retailers on Tuesday delivered a depressing message that hurt not only the price of retail stocks but also the entire market. The Dow Jones Industrial Average slid close to 700 points, or 2%, while the S&P 500 shed 2%, the Nasdaq Composite 2.5%, and the SPDR S&P Retail e xchange-traded fund 5%.

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The forecast didn't come as much of a surprise to D.A. Davidson analyst Michael Baker. He anticipates that many retailers would choose a conservative strategy for their 2023 projections, following the example set by Walmart and Home Depot, mainly because "there's really no motivation" to be more aggressive until customer spending patterns are more distinct.

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According to Corey Tarlowe, vice president of equity research at Jefferies, "you want to see an outlook or bar being set that is realistic and maybe even beatable."

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Both Baker and Tarlowe emphasized that as businesses get ready for earnings this week, there would likely be differences among retail subsectors. According to Tarlowe, businesses like Walmart, which sell a variety of everyday necessities like food and general products, might still succeed in a softer economy.

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Yet, people who are more exposed to discretionary spending could find it more difficult. For instance, management said on Tuesday that Home Depot's DIY sales underperformed the company's Pro division. But in the end, even the Pro industry, which caters to builders and other experts, is subject to market forces. Even if professionals are performing the work, as Home Depot CEO Edward Decker stated on Tuesday, "the consumer writes the cheque."

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