Walmart Inc. WMT-N is warning of a tough environment for consumer spending, adding a powerful voice to the chorus of concerns about the United States economy. Why are investors so keen on the stock?
The retailer’s share price rallied 6.5 per cent on Tuesday, after it reported its latest quarterly financial results. The share price is up 3.8 per cent this year, or more than 20 percentage points better than the S&P 500 Index, which has fallen by double digits in 2022.
That’s an impressive outperformance for a stock that relies upon a healthy consumer and must find a path through high inflation and rising borrowing costs.
Walmart’s quarterly results suggest the company is making encouraging progress through these difficult conditions.
It reported a loss of US$1.8-billion for the three-month period ended Oct. 31, because of an unusual US$3.3-billion charge to resolve lawsuits related to the role of its pharmacies in the opioid crisis. But push that aside and analysts generally liked what they saw.
Total revenue increased by 8.7 per cent over last year. Sales at U.S. stores open for at least 12 months increased by 8.2 per cent.
Walmart also reported good news on its glut of unsold merchandise, which weighed on the stock earlier this year when the company said its U.S. inventories had surged 34 per cent year over year, raising concerns about the prospect of writedowns.
In its latest report, though, Walmart said inventories were up a more reasonable 12.6 per cent over the same period last year. Management said most of these unsold products are now in stores rather than working their way through the retailer’s supply chain, providing additional relief.
Robert Moskow, an analyst at Credit Suisse, raised his target price on the stock – or where he expects the shares will trade within 12 months – to US$160, from US$145 previously. The shares ended the week at US$150.23.
Walmart’s upbeat results arrived amid other relatively upbeat signals.
Statistics on retail sales in October, released this week, showed an increase of 1.3 per cent from September after stalling last month. That was higher than the 1-per-cent gain that economists had been expecting, and it suggests consumer wallets remain open.
Some observers are even predicting that the U.S. economy will avoid slipping into recession next year, which is a sunnier outlook than the one that has prevailed through aggressive rate hikes by the U.S. Federal Reserve.
Jan Hatzius, chief economist at Goldman Sachs, pegs the chances of a U.S. recession at just 35 per cent. Economists recently surveyed by The Wall Street Journal put the likelihood at an average of 65 per cent.
Mr. Hatzius’s argument: Core inflation, which ignores volatile food and energy, is not entrenched and should subside to 2.9 per cent by the end of next year as supply chains heal, removing a key concern hanging over the economy.
But there are risks here. Walmart itself is taking a cautious approach, warning that shoppers are tapping their savings and struggling with soaring food prices.
“Despite a good start to the fourth quarter, our guidance assumes that the consumer could slow spending, especially in general merchandise categories, given persistent inflationary pressures in food and consumables,” John David Rainey, Walmart’s chief financial officer, said during a call with analysts this week.
Managers could be under-promising here in the hope of over-delivering with better-than-expected results next year.
But other retailers have also been taking sombre tones. Target Corp. warned this week that consumers are cutting back on discretionary purchases, particularly since the second half of October.
“Consumers are feeling increasing levels of stress, driven by persistently high inflation, rapidly rising interest rates and an elevated sense of uncertainty about their economic prospects,” Brian Cornell, Target’s chief executive offer, said during a call with analysts this week.
And some economists remain cautious on consumer spending.
Jocelyn Paquet, an economist at National Bank of Canada, said in a note that consumer purchasing power and confidence are in the doldrums, leaving two possibilities ahead: “Either wages will start rising faster than inflation in the medium term, or consumption will adjust lower,” she said.
She expects the latter: Rising input prices and higher financing costs will keep a lid on wage gains, while further rate hikes will lift debt servicing costs, putting additional strain on U.S. households.
This week’s euphoric response to Walmart’s quarterly results suggests that investors are optimistic the retailer can grab market share and deliver strong sales in the year ahead. It won’t be easy.