Retailers HD and WMT Face Lowered Demand

Major retailers are set to report this week with concerns that inflation has lowered demand and earnings could be impacted by tough annual comparables.

Walmart Faces Changing Shopping Habits

Over the last year, Walmart has been facing growing inventories and compressed margins as higher prices have changed shopping habits. As real wages have been declining for over a year, shoppers have switched to spending more on groceries instead of home items. That's a problem for Walmart since groceries have smaller margins. In the past, the company resorted to cutting prices on non-grocery items to move inventory.

Recently, Walmart has been pressuring its suppliers not to raise prices as logistics costs have started to decline. The focus on lower prices might help keep footfall up, but it remains on measures the company has taken and will keep taking to maintain margins and deal with inventory. Earnings are expected to be virtually unchanged from last year at $1.52, despite improved sales of $159.8B

Home Depot to Take Hit  from Housing Slump

Demand for home improvement has remained healthy over the last year, despite inflation crimping people's pockets. This could be due to people doing home repairs themselves instead of spending more on hiring professionals. On the other hand, the housing market experienced a significant slump at the end of last year, which could be undermining the enterprise revenue for Home Depot.

However, the company is facing even tougher comparables, as covid led to explosive growth continuing through the end of 2021. Focus is likely on operating margin, potential guidance around shopper behaviour, and how to increase transaction numbers. US housing starts continued to decline in the first quarter, so the company's construction segment outlook will be in focus. Earnings are expected to align with the prior year at $3.28 on similar sales of $36.0B.

Do HD and WMT Have More to Go?

A comparison chart of the two stocks shows that the two firms didn't perform all that differently since the beginning of Q4, 2022. However, Home Depot (black) spiked to nearly 20% at the beginning of February this year, while Walmart (blue) remained below its peak of 16% registered in early January. Based on the assumption that HD has ended its short-term upward trend and WMT remained in a corrective mode, we could see the latter move another 5% to take at least January's high out. On the other hand, the former might meet resistance around 4% higher, should it move higher.

Source: Barchart

Key Takeaways

Major retailers Home Depot and Walmart are set to report this week with concerns that inflation has lowered demand and earnings could potentially be impacted by tough annual comparables. Walmart is facing growing inventories and compressed margins, with shoppers spending more on groceries than on home items, and Home Depot is facing a slump in the housing market and potentially declining housing starts. Home Depot might meet resistance around 4% higher, while Walmart could move up to 5% before doing so.