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Walmart, Home Depot to benefit from inflationary environment: Analyst

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Michael Lasser, UBS Managing Director & Senior Analyst, joins Yahoo Finance to break down the earnings and outlook for Walmart and Home Depot.

Video Transcript

- And we want to keep talking about the markets and some of these retail sales numbers, and earnings reports, as well. And we have Michael Lasser, UBS managing director, senior research analyst joining us now. And Michael, thank you for joining us here today. You were just listening to Brian's comments about retail sales and the numbers that we got this morning. Let's lead off with that. What are you making of these numbers today?

MICHAEL LASSER: The numbers we got today were really strong. There's a couple of themes that are materializing. Number one, consumer is outspending, particularly in October, where there was signs that some of the holiday and seasonal items, the strength there was pulled forward because consumers are becoming increasingly aware that the supply chain challenges could result in inventory shortages later in the holiday season. As a result, consumer went out and bought some of these items in October.

The other thing that's happening is inflation is picking up. And retailers report sales in nominal dollars. And as a result, they're seeing this inflation and these price increases flow to-- flow through to their sales. So the theme is good sales, managing costs well. And this is resulting in pretty good performance for the retailers, especially the large ones, like Walmart and Home Depot.

- Yeah, let's talk specifically about Walmart's numbers here, because when you talk about those concerns around inflation, they did address that. Obviously, they're not immune to higher fuel costs and shipping costs, these additional costs that have come with the tight supply. And yet, they do have more of a cushion, being a big retailer. How real are the inflation concerns, you think, for Walmart? Or you think they're pretty well positioned to be able to ride out some of those pressures?

MICHAEL LASSER: So I think Walmart is very well positioned to ride out some of the pressures. What they are doing is saying we manage this as a portfolio, and we're going to balance passing along the price increases to our consumers and absorbing some of that, which could impact the returns for shareholders. Now, Walmart is known for low prices.

So the inflationary environment should ultimately be good for Walmart because the consumer is going to say, hey, my dollar goes farther at Walmart than it does elsewhere, so I'm going to spend more of my income at Walmart. That will allow it to gain share in this inflationary environment. So it's balancing prudently, it's growing its sales, it's growing its earnings. And we like this stock a lot, especially as we move through next year, which is going to be a very uncertain environment.

- And I want to turn to Home Depot now. This is a stock at a record high today. Nice pop off of its earnings. By the way, I should note also that the market cap of Home Depot just surpassed that of Walmart's today. Does it mean anything big? I don't think so. But some of the numbers here from Home Depot, really eye-popping. Ticket increases of 12.9%. People spending more money on their tickets, really just telling me that the home remodeling boom not even close to slowing, at least in the third quarter. What about the current one?

MICHAEL LASSER: So half of that ticket increase was coming from like for like product increases. So they're seeing an inflationary benefit from passing along some of those costs to consumers. But this is all against the backdrop of a very robust environment for home-related spending. If we can say one thing confidently coming out of the pandemic, it's that we all will be spending more time at home, if only because the instances of working from home will be higher in the future than they have been in the past.

That means the value of our homes have increased. And as a result, we'll be more willing to spend, repair, maintain our homes. That's to the benefit of Home Depot, especially because it's such a well-run company and a leader in that marketplace.

- And Michael, looking at the broader picture here going into the holiday season, how do you think things shape up when you consider all those headwinds you just mentioned? Number one, the potential for the supply simply not being there on the store shelves, but also those prices continuing to get pushed higher, with consumers already feeling a bit of that pinch in their wallets.

MICHAEL LASSER: So here's how we think the holiday plays out. We think it's going to be strong, especially as we get through Cyber Monday. Most likely, consumers will buy more earlier than they have in the past. We probably see a bit of a dip in spending after we get through Cyber Monday. And then the 10 days before Christmas should be quite good, not only because consumers will get back out and buy some of those holiday items, but also because some of the bottlenecks that we've all seen in the ports and in other parts of the transportation system, those should start to be alleviated, and more product will be flowing to store shelves.

This is not an issue that's going to be resolved overnight, nor is it going to be resolved in the next few weeks. It's going to last well into the first part of next year. But these retailers, especially the large, well positioned ones, are doing a better job of navigating through that than others. And that's going to allow them to continue to have products on their shelves. So I would encourage you to go out and do your holiday shopping now, just in case there-- you know, some of these items are not available in the future. But overall, the holiday spending environment should be quite good.

- And Michael, we've got time for another quick one right here. I'll give you the floor. Any other earnings, retail earnings on your horizon here this week or the next?

MICHAEL LASSER: So we've got Target and Lowe's tomorrow. We're going to see similar trends-- robust sales, some drag from the supply chain costs, inflation being passed along to the consumer, the outlook for the holiday being strong. We like those stocks. These are four big retailers, between Walmart, Target, Home Depot, and Lowe's. They're going to take share in an otherwise uncertain environment. We think they make good stocks heading into next year, and we would be buyers.

- Michael Lasser, UBS managing director and senior research analyst, good to talk to you today.