Home Depot/Walmart: labour pains engulf pandemic stars

Capital had a great run. It is still labour’s turn. That was the message from Home Depot’s fourth-quarter earnings on Tuesday.

The giant DIY retailer needs more workers to help customers buy washing machines or sheets of plywood. It expects to spend an incremental $1bn in wages for frontline staff, a figure that would depress its closely watched operating margin by 60 basis points, pushing the figure below 15 per cent.

Home Depot foresees flat sales in 2023. It believes earnings will be slightly lower as Americans shift consumption towards services instead of the goods that were in demand during the pandemic.

The company pointed out its annual revenues have grown by $47bn in the past three years, a remarkable number for a company with annual sales already above $100bn. The shares are still well above where they stood in 2019. There is enough cash flow to pay out $15bn to shareholders for 2022 in the form of dividends and buybacks.

The results still confirm the worry that corporate earnings will now be braked by higher costs and softer demand. A putative monetary easing cannot alone sustain a rally in stock prices.

According to data service FactSet, the valuation of the S&P 500 has moderated to a multiple of 18 times. That is still above the 10-year average.

Home Depot is not alone in raising wages. Walmart recently announced that its minimum wage for employees will be $14 per hour while its average worker will make $17.50 per hour. The big general retailer and grocer provided a lacklustre outlook on Tuesday. Home Depot stood out for being even more pessimistic.

Well-paid professionals may scoff at the wages taken home by retail workers. But there is satisfaction for the latter in seeing pay rising at employers once decried as tight wads. A trend first trumpeted as the pandemic abated in the US is enduring longer than some forecasters imagined. With businesses reluctant to raise prices further, investors can expect profits to take a hit.