Home Improvement Retailers Provide Insight into the Economy

Investors seeking to understand the strength of the US economy heading into the summer period closely watch the two major US retailers, Home Depot and Walmart, this week.

Interest Rates Hurt Home Depot

The largest home improvement chain in the US reported earnings on Tuesday before the market opened. Revenue came in below forecasts as customers delayed spring projects due to higher borrowing costs. Analysts expected sales of $36.7 billion, but Home Depot managed just $36.4 billion in the first quarter. The company was able to keep costs down though and surpass analyst profit forecasts by $0.03 at an EPS of $3.63. Investors were reassured by management as it reaffirmed its full-year guidance.

Home Depot said it expected its sales growth to pick up later in the year, expecting just a 1% decrease in same-store sales compared to the prior year. Management noted that customers are deferring large spring projects as interest rates remain high, but they could resume such activities if the Fed lowers interest rates later in the year as expected. This suggests the economy may experience some near-term softness as debate continues around policy and how it might impact consumer and business spending. Lower home sales have also contributed as mortgage borrowing has become more costly, with homeowners expected to boost renovations if market conditions improve alongside falling loan costs.

Walmart Expected to Beat Inflation

On the other hand, Walmart's earnings are expected to grow at a faster rate than inflation, rising 6.1% to $0.52 per share. This would surpass expected revenue growth of 4.5% to $159.2 billion as American consumers continue to spend heavily online searching for bargains as inflation squeezes budgets. This presents unusually stiff competition for Walmart from the likes of Amazon and Temu, especially in clothing, electronics, and personal care products, which typically offer higher margins.

Walmart's largest revenue component, general merchandise, has led to increased inventories. Investors will closely monitor this area to gauge how the company plans to counter competition and accelerate turnover without impacting margins. Managing inflationary pressures has posed a challenge since the pandemic began. However, with signs of cooling CPI and potentially increased spending, Walmart may provide a more optimistic outlook.

Walmart Might Have Ended Wedge Pattern

Walmart's share price has corrected since reaching a new record high of $61.85 in March. However, it has been trading within a somewhat narrow range, forming a wedge pattern. If it completed at $58.50, the 5-wave impulse to $61.35, followed by the brief pullback retesting the upper trendline, could trigger further upside to the projected measured-move of $63.10. Failure to hold above the swing low of $59.50 and subsequent support may lead prices to fall to around $55.60, should the $57 support give in to potential pressure.

Source: SpreadEx Walmart

Key Takeaways

This week, investors closely watch Home Depot and Walmart's earnings reports to understand the strength of the US economy heading into summer. Home Depot revenue missed forecasts due to delayed spring projects from higher borrowing costs, though profits beat targets. Management expects sales growth to pick up later in the year if interest rates decline as forecasted. On the other hand, Walmart's earnings are projected to rise faster than inflation on strong online sales. However, high inventory and competition pose challenges in managing inflation, leaving sentiment hanging on the Fed.