Americans have kept spending despite jitters over the global economy, with Walmart raising its outlook for the US and government data showing unexpectedly strong retail sales.
Walmart, long considered a bellwether for middle-class spending, said US consumers were in “solid” financial health as it shrugged off the Trump administration’s trade war with Beijing and turmoil elsewhere in bricks-and-mortar retail.
But the domestic strength, which drove Walmart shares up about 5 per cent on Thursday, contrasted with a weaker outlook overseas. Executives said Brexit uncertainty had hit non-food sales at its Asda chain in the UK, where markdowns also weighed on margins.
The figures from the world’s biggest retailer, which has more than 11,300 stores and employs about 2.2m people worldwide, are being scrutinized particularly closely as investors worry about recession risks.
Downbeat data from China and Germany this week raised fears that a global slowdown could spread to US consumer spending, which has supported the domestic economy. Another profit warning this week from US department store chain Macy’s added to the concerns, while shares in high-end fashion group Tapestry dived 22 per cent on Thursday after a disappointing earnings report.
However, economic data released on Thursday provided some reassurance to Wall Street that the difficulties in US retail are company-specific. The 0.7 per cent rise in July from a month earlier was the strongest reading in four months.
The figures were probably “flattered” by Amazon’s Prime Day event in mid-July but still provided a rare bit of positivity amid mounting gloom, said Michael Pearce, economist at Capital Economics. “Consumption growth remains strong”.
The data could further complicate the Federal Reserve’s rate strategy. The Fed last month reduced rates by 25 basis points in what many economists believe was the first in a series of cuts to shore up the economy.
Walmart’s second-quarter results on Thursday pointed to diverging fortunes globally. In the US, executives increased their outlook for like-for-like sales. They now expect them to rise “towards the upper end” of a previous range of between 2.5 per cent and 3 per cent. “Our customers’ economic health remains solid and our competitive position is strong,” said Brett Biggs, chief financial officer.
The scale of its US grocery business is insulating Walmart from the worst of the pressures in retail, and the company is also investing heavily online to take on Amazon, in areas such as grocery pick-up facilities that allow shoppers to buy online and collect in person.
The investments are weighing on gross profit margins, which dipped 46 basis points in the quarter, yet Doug McMillon, chief executive, said they were “paying off”, noting US ecommerce sales jumped 37 per cent in the quarter.
“More than ever, we’re innovating across the business. We’re experimenting with emerging technologies to improve store operations and reduce friction,” he said.
Executives were more cautious about Walmart’s overseas interests, pointing to “softness” in Canada and the UK. They cut the full-year net sales forecast for the international business from a rise of 5 per cent on a constant currency basis to a range of between 3 per cent and 4 per cent.
“Uncertainty surrounding Brexit continues to loom,” Mr. McMillon said. Roger Burnley, Asda’s chief executive, added in a statement that the quarter provided a “case study on the impact the mood of the nation has on UK spending habits”. Walmart had planned to sell Asda to its rival J Sainsbury, but competition regulators blocked the deal this year.
Despite the more pessimistic forecast for the overseas businesses, the US strength was enough for Walmart to lift its group-wide profits guidance. Executives are now hopeful they might turn a profit this year despite the investments the company is making, targeting a slight decrease to slight increase in operating income for the year. They previously expected a low single-digit percentage decline.
Across the group, revenue in the second quarter rose 1.8 per cent from a year ago to $130.4bn. Net income came in at $3.68bn compared with a $727m loss in the same three months a year ago.
Source: Financial Times August 15, 2019 | By Alistair Gray and Mamta Badkar