Walmart, Home Depot cautious on 2023 as inflation bites

Walmart reported better profits than expected for the critical holiday-season quarter Tuesday, but offered a cautious outlook on the year ahead as inflation squeezes consumers.

The world's biggest retailer benefited from robust sales in groceries that offset weakness in discretionary goods during the just-finished quarter.

Chief Executive Doug McMillon said the chain expects "stubborn inflation" in food as executives acknowledged that grinding price pressures were hitting some consumers, denting the outlook.

But McMillon said the chain's expanded e-commerce and delivery business were drawing in more middle- and high-income shoppers.

Profits over the quarter ending January 31 came in at $6.3 billion, up 76 percent from the year-ago period. Revenues rose 7.3 percent to $164 billion.

Shares of Walmart initially tumbled, but later pushed back into positive territory.

Meanwhile, shares of US home improvement giant Home Depot fell sharply as it projected flat 2023 sales and announced $1 billion in fresh spending to boost employee salaries.

- Consumers feel pinch -

Walmart, the biggest US private employer, is considered more insulated in an inflation-focused period than other chains because of its reputation for value.

The company's fourth-quarter results showed particular strength in groceries and other consumable categories like pet and personal care.

That helped offset the hit from lower sales in areas like toys, electronics and home goods, which have higher profit margins but which have been less sought-after as shoppers pay more for fuel and household staples.

Walmart's results have also been pressured by higher labor costs and excess inventory of some goods, although the company said it made progress on this front.

The company's profit outlook for the current year was estimated at $5.90 to $6.05 per share, with much lower US comparable sales growth. Analysts had projected profits of $6.50 per share.

Walmart also sees net sales growth of at most three percent, less than half the revenue growth over the last year.

Chief Financial Officer John David Rainey said the forecast reflected "a lot of uncertainty with the macro backdrop" as the Federal Reserve moves aggressively to counter inflation.

"We see issues where delinquencies are up in things like auto loans and you've got savings rates that are coming down," Rainey said. "And there's a lot of unknowns in the back half of the year."

- Boosting pay -

At Home Depot, profits for the fourth quarter were essentially unchanged from the year-ago period at $3.4 billion, while revenues inched up 0.3 percent to $35.8 billion.

Revenues were slightly below analyst expectations and Home Depot's projection of flat sales in 2023 also came up short. The company also forecast a dip in earnings per share.

During a conference call, Chief Financial Officer Richard McPhail said the outlook reflected a shift in consumer spending from goods to services.

Early in the Covid-19 pandemic, home improvement spending accounted for an outsized portion of discretionary consumption, with housebound workers undertaking costly upgrades.

Home Depot announced it will invest an additional $1 billion in hourly staff, citing the need to attract and retain frontline workers.

The increase means that staff will earn at least $15 an hour throughout the United States, executives said.

"After a year of defying gravity, the slowing economy and pressures on consumers have finally caught up with Home Depot," said Neil Saunders of consultancy GlobalData. He also noted that higher interest rates dragged on the housing market.

While the company's outlook for flat sales is a big come-down from the pandemic peaks, "we believe holding onto the extensive sales gains the company has made since 2019 represents something of a win," Saunders said in a note.

Shares of Walmart rose 0.6 percent to $147.33, while Home Depot tumbled 7.1 percent to $295.50.