Walmart stock climbs despite cautious outlook as Home Depot falls

Key takeaways

• Walmart showed US consumers spent more than anticipated in the final three months of 2022, confirming the strong retail sales data out earlier this month
• But Walmart is taking a cautious view on the year ahead and expects sales growth to slow and that earnings will remain under pressure
• Meanwhile, the challenging macro environment appears to have caught up with Home Depot as demand for DIY stalls
• That is dragging down other retailers today, including Target, Lowe’s and Costco

Walmart and Home Depot fall on weak outlooks

US retailers are under the spotlight today after Walmart and Home Depot both warned earnings will grow at a much slower rate than markets anticipated over the coming year. Walmart shares initially sank over 3% in premarket trade but have bounced back to trade 0.5% higher in early trade, while Home Depot shares are having a much tougher time and are down over 5%.

The outlooks have cast a dark cloud over the sector and Target and Lowe’s are being dragged down ahead of their reports next week. Other retailers including Costco and Dollar General are also suffering in the wake of the results.

Walmart earnings to drop for second successive year

Walmart, the largest retailer in the world and the biggest single employer in the US, said it expects to deliver tepid net ales growth of 2.5% to 3% over the new financial year to the end of January 2024, which is below its long-term goal of 4%. It said it plans to deliver EPS of $5.90 to $6.05 this year, down 3.8% to 6.2% from the previous year. That means earnings will fall for a second consecutive year. That was all the more disappointing considering Wall Street believed earnings could grow to $6.50.

That suggests Walmart has become more cautious when it comes to the year ahead. Sales remained strong in the fourth quarter of 2022, rising 7.3% from last year to $164.05 billion – smashing the $159.76 billion forecast. That, twinned with the stronger than anticipated retail sales data out earlier this month, suggests US consumers are still spending and that Walmart is outperforming rivals and gaining market share.

However, news that sales growth will slow, with guidance for the first quarter of the new year pointing toward a 4.5% to 5% rise in sales, shows the retailer is expecting consumer spending to moderate as the macro environment bites. CFO John Rainey said there was ‘a great deal of uncertainty’ around the economy this year.

Supply chain problems have abated and the worst of its inventory woes are past it, but those headwinds are being replaced by concerns that higher interest rates and inflation will put consumer finances under further strain. Shoppers are still spending, but more of their money is being swallowed up by essentials like food and drink, leaving less to spend on discretionary items. The head of its US unit John Furner said there had been some acceleration in the number of consumers trading down to private brands from more expensive branded products, signalling that customers are finding it more difficult.

Management admitted that forecasting what to expect in the second half of the new year will bring is difficult, which shows the level of uncertainty but also leaves scope for its outlook to improve depending on how things turn out. Morgan Stanley analyst Simeon Gutman said the guidance for the year ‘looks conservative and sets an appropriate baseline to over-deliver’.

Where next for WMT stock?

Walmart shares are up 0.5% this morning at $147. The stock has tried and failed to break above $146.60 on numerous occasions in early 2023, so closing above here would be significant. If it can break above this immediate upside target, then a much larger potential move toward the 2021-highs of $152 is on the cards.

The 44 brokers that cover Walmart see greater upside potential with the average target price sat at $161.50 – above the all-time highs we in April 2022.

The supportive trendline remains intact and suggests $141 is the ultimate floor.

Home Depot sees growth stall

The challenging macro environment appears to have caught up with Home Depot, which saw sales and profits jump as people renovated their properties during the pandemic. Sales rose just 0.3% in the fourth quarter amid softer demand for home improvement products as rising inflation continues to take its toll.

The housing market has slowed down as financing becomes more expensive thanks to higher interest rates, but Home Depot has argued before that it can still deliver in times like these because people stay put for longer and invest more time in repairs and upgrades of their existing home. However, that argument appears to have lost some authority considering Home Depot warned  revenue and comparable sales will both be flat this year. That means sales growth has now peaked.

Meanwhile, earnings will decline by a mid-single digit percentage in 2023, which was a surprise for Wall Street that thought it would be able to eke out mild 0.4% growth. That miss came as Home Depot announced it was raising wages for frontline staff in a move that will push up annual costs by about $1 billion, demonstrating the huge pressure that rising costs is having on the sector.

Where next for HD stock?

Home Depot shares are down 5.8% this morning and trading at their lowest level in over three months to test the $300 threshold that has proven to be a notable level on several occasions in recent months.

We may see the 200-day moving average provide some support today if it can recover some of its losses, but the stock could slide toward $299, in-line with the June 2021 low that resurfaced as a level of support in early 2022. That has already been tested today but appears to be the level to attract some buyers back into the market. A steeper fall below $290 would be on the cards from here.

On the upside, the immediate aim is to close the gap created today and rebound back above $313. Brokers see further upside potential with the average target price sat at $337.50.

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