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Retail earnings: ‘The consumer is still engaged,’ analyst says

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Refinitiv Director of Consumer Research Jharonne Martis joins Yahoo Finance Live to discuss U.S. retail sales for April as well as quarterly earnings for Walmart and Home Depot.

Video Transcript

BRAD SMITH: Welcome back, everyone. We got a better idea of how consumers are spending their money in April's retail numbers. The results coming in just below estimates at 9/10 of a percent compared to the month before. To talk more about these numbers, along with this morning's big retail earnings reports that we've seen come through, we've got Refinitv director of consumer research, Jharonne Martis, joining us. And Jharonne, first and foremost, just want to get your reaction to the retail sales figure. Of course, slightly below the broader estimate, but if there's anything that you're picking out from this report, what would it be?

JHARONNE MARTIS: Well, good morning, Brad. Yes, it was another strong month for April. The expectations came in line with what Refinitiv was looking for, IFR. Now, what's also interesting is that the previous months did get revised much higher. And based on the numbers today, for the month of April, it's still interesting to see that the consumer is gravitated to some of the pandemic themes, which is that they're still gravitating online to finalize a lot of those purchasing items.

In general, when combined with all of the retail sales data today, it shows that the consumer is still engaged, despite a lot of the macroeconomic issues that are being discussed.

BRIAN SOZZI: Jharonne, when Walmart comes out here this morning, and they note that they were surprised by the levels of inflation, and they are likely to take price increases in a lot of categories, what does that mean for their broader retail sector?

JHARONNE MARTIS: I think that the earnings numbers today for Walmart are representative of a misexecution on Walmart's behalf, especially when it comes to overstaffing. I think one key indicator today in today's number is the Sam's number, meaning Sam's had gained a lot of memberships, extra memberships, that were being value conscious and wanted to save money at the pump. If you look at the Sam's same store sales, that came in at 17%. But if you exclude fuel, that number is still in the double digits at 10%.

So this is telling us that those memberships are actually converting into revenue and to sales growth at Sam's so that the consumer is still engaged. They're just trying to find ways of saving money and are going to the clubhouses to save on money. When you compare Sam's, Costco, BJ's, to the other discounters, the other discounters are expected to do a little bit less than the clubhouses this quarter because consumers are gravitating towards the sales and discounts.

JULIE HYMAN: Hey, Jharonne, it's Julie here. You mentioned that the company talked about staffing as one of the things that it sort of misexecuted. It didn't expect as many staff to come back after COVID as did, and so it had higher than expected costs, labor costs related to that. It also saw a build in inventories. Are you-- so if it's an execution issue in part, are you satisfied with what you're hearing from Walmart about what it's doing to address those two areas of higher cost?

JHARONNE MARTIS: So, going forward for the second quarter, what is positive is the fact that Walmart does believe that revenue will continue to grow because they did raise guidance. What is troublesome is the fact that they did lower their profit expectations. And this is actually a theme that we're seeing across the board, mainly because of inflation. Companies are giving us guidance for the second quarter, and that's coming in more negative than positive. In fact, when we look at the earnings calls for all the companies that have reported, about 99%, pretty much all of them, are mentioning that they're still facing supply issues. And about 95% of them, so a little bit less, are concerned with inflation.

So this is telling us that unless-- you know, this is, obviously, retailers are going as they're learning, as we're moving along during the pandemic. But they're going to have to do a better job in mitigating some of those costs because those costs are coming in much higher. And when we look at the forecast for EBITDA, a lot of the gross profit margins, those are expected to come in a little bit lower in the second quarter.

BRAD SMITH: So you--

JHARONNE MARTIS: And retailers are warning us about this.

BRAD SMITH: Right, and so you have Walmart on one end, you've got Home Depot on the other, and in the home improvement category, I mean, they're even led to raise their guidance, shares moving higher here early in trading. So if we kind of break down one area that is particularly buying further into the home, renovating, doing these projects where, yeah, Home Depot still faces a lot of the same inventory considerations that a Walmart may, but in a very specific category separate from the broad-based kind of different categories that Walmart has to think about at the end of the day, how would you measure where Home Depot moves forward from here?

JHARONNE MARTIS: So it's very interesting, right, because the Home Depot really caters to the middle class, to the broader consumer. And this is telling us that the consumer is still engaged in fixing their homes. So we're seeing that pandemic theme, again, resonating, that consumers are still investing. And the stay at home experience, we saw that again in the April numbers, that they're still gravitating online to purchase a lot of their goods.

But then when you break down and you compare with Walmart, Walmart does cater mainly to the low income consumer. And that consumer this year is actually facing-- they're not facing-- they're not receiving their government stimulus checks, like they did last year. So and they're facing higher inflation. So they're being squeezed more than the middle class consumer. On top of that, it's very important to note that this particular quarter, as we've gone through earnings season, retailers are facing the most difficult comparison in the pandemic altogether. They're facing record high same store sales numbers.

And despite facing those difficult comparisons numbers, I would say that today's numbers were very healthy. So this is a good sign that the consumer is still engaged, despite all the macroeconomic headwinds. Also the fact that spring merchandise sold very well at Home Depot, given that cool weather was still prevalent throughout the quarter, this is something that on the other hand, we saw Walmart suffer for, right? Walmart did see that the spring merchandise didn't sell as well, but home people did. So it's more of an execution on both ends, and also the fact that Walmart caters more to the low end consumer, who is being hit harder than the middle class consumer that might be shopping at Home Depot.

JULIE HYMAN: Jharonne, really interesting stuff and perspective on these two very important reports. Jharonne Martis is Refinitv director of consumer research. Thanks so much.