Walmart issues cautious outlook as Fed rate rises sink in

Walmart said it expected sales growth to moderate in the second half of this year, prompting the world’s largest retailer to issue a cautious outlook for 2024 as it observes the impact of the Federal Reserve’s aggressive campaign to raise interest rates.

The company set sales and earnings forecasts below analysts’ expectations, even as it reported a strong fourth-quarter in which bargain-hunting shoppers underpinned spending in December that was the biggest month in sales on record for Walmart’s US operations.

“There’s just a lot that we don’t know,” Walmart chief executive Doug McMillon told analysts during a Tuesday earnings call. “We could tilt into a recession. We don’t know what happens to consumer spending. We don’t know what happens to lay-offs [and] household income. And so given that we’re so early into the year and there’s a lot of unknowns right now, we’re simply taking a cautious outlook.”

Walmart executives said the strong December sales in the US were led by food, but that was partially offset by declines for general merchandise sales. At its Sam’s Club subsidiary, management said positive sales trends during the fourth quarter for discretionary items such as apparel and merchandise were still holding in place as recently as the Super Bowl and Valentine’s Day.

Chief financial officer John Rainey said Walmart expected sales growth to be “strongest” in the first six months of this year, and then moderate in the back half against an uncertain economic backdrop.

“We’ve not been in a position where we’ve seen the Fed tighten this shortly. We see issues where delinquencies are up and things like auto loans, you’ve got savings rates that are coming down. And there’s a lot of unknowns in the back half of the 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.

Home Depot chief financial officer Richard McPhail said the do-it-yourself retailer was, like many economists, assuming flat economic growth and consumer spending in 2023.

“Over the last seven quarters, we have seen our transactions gradually normalise as consumer spending has shifted from goods to services,” he said. “If this shift continues at its current pace, the home improvement market would be down low single digits.”

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 more sensitive to the huge US property market.

Walmart shares recovered early declines to close 0.6 per cent higher on Wall Street on Tuesday, while Home Depot sank more than 7 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 US economy.

Following a blockbuster jobs report, Fed chair Jay Powell earlier this month warned 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 it expected to continue to gain from higher-income shoppers, who are searching for discounts amid persistent inflation.

“We’re gaining share across income cohorts, including at the higher end, which made up nearly half of the gains we saw in the US again this quarter,” McMillon said.

Home Depot predicted 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.

“We see some more price sensitivity,” chief executive Ted Decker told analysts during an earnings call on Tuesday, which was greater in the fourth quarter than in the previous three months.

Home Depot’s 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 do see a unique environment with many cross-currents right now. Obviously there’s heightened inflation and rising interest rates. The tight labour market is moderating equity in housing markets. So given all that, we do expect moderation in home improvement demand” this year, Decker said.