Bleak outlook: A Walmart store in California. Walmart forecasts lower-than-expected profit for the full year, citing uncertainties related to consumer behaviour and global economic and geopolitical conditions. — Bloomberg
NEW YORK: An uncertain outlook from Walmart Inc is putting investors on high alert ahead of earnings from other retailers, casting a pall over the economically sensitive sector.
The world’s largest retailer forecast lower-than-expected profit for the full year earlier last week, sending its shares tumbling. Walmart typically offers a lukewarm forecast at the start of its fiscal year and executives said American consumers remained resilient.
Still, the mixed outlook raised the specter of further disappointment when other chains such as Home Depot Inc, TJX Cos and Target Corp disclose results in coming weeks.
Walmart is a “barometer for consumer spending, consumer sentiment,” said Michael Arone, chief investment strategist at State Street Global Advisors for the US SPDR ETF business. “They set the tone with what I view as a very conservative forecast for the balance of this year.”
Economic worries helped sink stocks last Friday, after percolating for weeks even as the S&P 500 marched to record highs. The index fell 1.7%, its biggest drop in two months, after data showed US business activity expanded at the slowest pace pace since September 2023 and a survey of consumers signalled elevated inflation expectations.
Such uncertainty could weigh on the economically sensitive shares of retailers - especially if it’s confirmed in earnings reports. Indeed, the comeuppance for Walmart was swift, with its shares sliding 6.5% last Thursday in the biggest one-day drop in 15 months. Shares of other retailers, from Costco Wholesale Corp to Target, also fell.
The S&P Retail Select Industry Index ended last week at the lowest level since November.
Walmart’s rout may have been exacerbated by investors’ high expectations after a roughly 80% surge in the stock price over the past 12 months. Its shared traded around 37 times projected earnings into last Thursday’s report, making the stock more expensive by that measure than tech darling Amazon.com Inc.
“Valuations for S&P 500 consumer staples retail stocks are extremely high relative to norms, suggesting the expectations for future earnings growth may be simply too onerous for companies to satisfy in the short run,” said Bloomberg Intelligence chief equity strategist Gina Martin Adams, in a recent report.
Retailers face a myriad of unknowns. Tariffs are one source of uncertainty, after US President Donald Trump temporarily paused them on products from Mexico and Canada and imposed additional levies on China. Many consumer companies have yet to incorporate the impact of tariffs into their guidance.
Meanwhile, US retail sales slumped in January by the most in nearly two years, though wildfires in Los Angeles and severe winter weather also impacted results. US inflation picked up, led by a range of household expenses like groceries and gas, as well as housing costs.
Until investors get more clarity on tariff policies and interest rates and a greater sense of optimism from retailers, “you would expect the stocks to be a bit more volatile,” said State Street’s Arone.
John San Marco, portfolio manager of the Neuberger Berman Next Generation Connected Consumer ETF, expects to “hold up a stronger microscope” to February data after the soft January retail sales and hotter-than-expected inflation numbers.
For now, Home Depot and TJX are among his top picks in the retail space. He likes Home Depot’s pricing power and sees early signs of a home improvement recovery. TJX has a flexible supply chain, and the value proposition of its products is strong, he said. Both companies report earnings this week.
Mari Shor, senior equity analyst with Columbia Threadneedle, anticipates that tariffs won’t pressure retailers’ margins as much as feared given many companies in categories like apparel and footwear have shifted production outside of China.
The bigger question, in her opinion, is what happens to consumers’ spending on discretionary goods if tariffs create more inflation.
Wall Street will also be keeping a close eye on the February reading of the Conference Board Consumer Confidence Index that’s expected this week. US consumer confidence unexpectedly dropped in January to a four-month low.
“Consumers are in solid financial shape, but equity markets could suffer if insecurity remains about inflation and housing costs,” BI’s Adams said. — Bloomberg
