Walmart issues cautious outlook with US consumers under pressure

Walmart issued cautious guidance for the year ahead, adding to concerns about the health of the US consumer and the outlook for the economy at a time of elevated inflation.

The world’s biggest retailer set forecasts below analysts’ expectations even as it reported solid fourth-quarter results, driven by discount-seeking shoppers. Chief executive Doug McMillon said the company had “built momentum” in recent months and was “well-positioned” to start the new year.

Walmart’s soft outlook was echoed by Home Depot, which warned its full-year earnings could decline for the first time since the financial crisis, against a backdrop of elevated inflation and mortgage rates that is blunting consumer demand for home improvement.

With more than three-quarters of a trillion dollars in annual sales between them, Walmart and Home Depot are often regarded as barometers of the American consumer, with the latter also considered an indicator of the huge US property market. Walmart shares were down 1.3 per cent in early Wall Street trading on Tuesday, while Home Depot sank 4.8 per cent.

The guidance from the two retail chains follows several weeks of stronger-than-expected US economic data, including inflation, jobs growth and retail sales, that have prompted markets to reassess their bets that the Federal Reserve will cut interest rates later this year in response to a probable slowing of the American economy.

Following a blockbuster jobs report, Fed chair Jay Powell warned earlier this month that interest rates might have to be raised higher than investors expected because the strong labour market meant it could take longer for inflation to return to the central bank’s 2 per cent target.

Walmart forecast net sales growth of 2.5 to 3 per cent for the current fiscal year, below Wall Street’s prediction for a 3.3 per cent increase. It expects adjusted earnings in a range between $5.90 and $6.05 per share for 2024, missing analysts’ forecast of $6.50.

In its fourth quarter ended January 31, net sales rose 7.3 per cent from a year ago to $164bn and diluted earnings jumped to $2.32 a share, both ahead of market forecasts.

Walmart said consolidated gross profit declined 83 basis points in the fourth quarter as it relied on markdowns to overcome excess inventory and consumers spent less on discretionary items and more on low-margin items such as groceries.

Home Depot predicted that revenue and comparable sales in fiscal 2024 would be flat compared with last year, while diluted earnings per share would decline by “mid-single digits”.

That would mark the weakest sales growth for the DIY retailer since its 2010 fiscal year, and the first drop in annual earnings since fiscal 2009, according to Refinitiv data. Analysts expected slight growth.

The gloomy forecast accompanied sales and earnings in the company’s fourth quarter that were slightly above and below Wall Street forecasts, respectively, and transaction volumes that were down 6 per cent from a year ago.

“We expect this to be a year of moderation in demand for home improvement,” chief executive Ted Decker told analysts during an earnings call on Tuesday.

Consumer demand for home improvement goods soared at the height of the pandemic as people focused on remodelling their homes while in lockdown. But as inflation squeezes household budgets, shoppers are prioritising necessities such as food over discretionary spending, as well as experiences outside of the home.