Walmart raises outlook as sales soar, Home Depot sees impact of weakening DIY trends

Myles Udland, Brian Sozzi, and Julie Hyman break down some of Tuesday’s early market movers, which include: Walmart topping expectations driven by a surge in groceries and back-to-school spending and Home Depot posting a revenue beat but missing on same-store sales as the housing renovation boom starts to cool down.

Video Transcript

MYLES UDLAND: All right, let's move now to some earnings that we got out earlier this morning. Let's start with results out of Home Depot. We see revenues here coming in a little bit better than expected. Adjusted earnings per share coming in a little bit better than expected. But on the Comp sales line, Home Depot coming in lighter than the Street was looking for. Brian Sozzi, you've been looking through this report. What stands out to you in Home Depot's latest quarter?

BRIAN SOZZI: Not a surprising market reaction. Not a surprise with-- to see some of these fundamentals in the quarter. If you were not living under a rock the past month, you saw results from a Sherwin-Williams, Stanley Black & Decker. I call them squishy. They were a little bit below, I, think some Street estimates. You saw United Wholesale Mortgage out there yesterday, disappointing quarter, disappointing guidance. The housing dynamics are starting to slow down after a year of a lot of strength.

And, really, some three areas of concern inside of Home Depot's results here, guys-- first up, the US same-store sales result, 3.4% increased. Street was looking for a 4.9% increase. Gross profit margins down 77 basis points versus last year. Looks like Home Depot was hit by supply chain inflation there as well. And then customer transactions down 5.8% year over year. Guess what they did in the first quarter, they were up at 19.3%.

So you seeing that sequential slowdown, one, because consumers spent a lot last year. And two, Home Depot is going up against some very, very large numbers. You know, I tweeted out this morning looking at Home Depot's same-store sales over the past 7/4. They have two more quarters guys where they're going to be cycling double-- really, 20% plus same-store sales gains. So you could see a further slowdown in Home Depot's results in the third quarter as it cycles those-- as it cycles those results.

JULIE HYMAN: Something else to note. The average purchase price-- I don't think you mentioned-- was up by 11%. And as we see, perhaps the number of transactions go down. A couple of things to watch-- first of all is our price is going up. We know that lumber prices have started to moderate, but our other prices continuing to go higher. And not only that. Are we transitioning from more DIY projects to remodeler projects? Professional remodelers. What is that going to do to Home Depot's numbers? That might have also led to an increase in average ticket, for example, as well. Are people buying more at once and more expensive if they are professional buyers versus individual buyers. So those will be things to watch for-- for Home Depot also.

MYLES UDLAND: Yeah, as you return to the office, you don't have time to go putz around the yard, you know, when you're in a meeting or whatever--

BRIAN SOZZI: Go out and buy 40 new plants, and bags of concrete, and some lumber. Also, to listen, keep in mind, lumber price inflation, some inflationary categories for Home Depot in the quarter that reversed in the second quarter compared to the first quarter, and certainly, that showed up in this quarter.

MYLES UDLAND: Yeah. Look, I was at Home Depot a lot less in Q2 than I was in Q1. So there you go. That was really a tell, Sozzi. You're going through Black & Decker.

JULIE HYMAN: The other indicator.

BRIAN SOZZI: It was really Myles [INAUDIBLE].

MYLES UDLAND: You could just ask me what I was doing. I would have let you know Home Depot's going to come in a little soft on [INAUDIBLE].

BRIAN SOZZI: Thanks for the guidance. Appreciate it, bro.

MYLES UDLAND: There you go. That's, you know-- that-- that's why you watch us. All right. Let's turn our attention now to Walmart's latest quarter, company out with its latest results. We see here a beat on the top line and a beat on the bottom line. But as we kind of teed this up heading into the quarter from Walmart and from Home Depot, we'll get more-- more color on this from Target and TJ Maxx really later in the week in terms of what the back-to-school season looks like, what the Delta variant impact might be as well.

Something certainly stood out to me, Brian Sozzi, in this earnings release-- in their earnings presentation. Comp sales better than expected, reflecting strong underlying business trends and a robust US economy and stimulus spending. They go through a couple of other items there. But the Walmart economy, the Walmart indicator, let's say, on the US economy essentially says there is no problem right now with their customer base, the confidence, the health of their consumer base.

BRIAN SOZZI: Well, let me just start with the stock price reaction. And you are right, Myles, we definitely teed this up yesterday. The stock had run up about 7% into the company's earnings report. There were some really high expectations on this quarter most notably around the US business whisper numbers were for about the same-store sales increase in the key US business of 6%. Walmart came in at 5.2%, overall a good quarter. But I think the Street wanted to see just a little bit more.

Next up, on the third quarter guidance, $130 to $140 a share. Consensus was at about $131. Again, we're nitpicking here. But I think the Street would have liked to see a little bit more from Walmart in terms of the third quarter guidance. So they did come out pretty aggressively for the full year.

And then last but not least, e-commerce sales in the US 6% growth. So you're seeing another retailer come out here and say we are seeing some slowing growth. Myles, to your point on the health of their business, I caught up with Walmart CFO Brett Biggs this morning ahead of the show. He's telling me that back-to-school shopping season has started strong.

And there's Brett Biggs right there. Back to school off to a strong start for Walmart. A lot of folks, he said, out there buying school supplies. And that is good to see. I also asked Biggs about if he has seen any change in shopper behavior because of the Delta variant. He has not seen that. He did acknowledge there are more people wearing masks inside the stores. But in terms of changing their shopping behaviors, whether they're buying more or buying less, he's telling me that they didn't see any big changes quarter over quarter.

JULIE HYMAN: Which is interesting. And also if you look at some of the color from the company's presentation, in contrast to that retail sales data from the macro basis, they said there was strength in apparel and travel-related categories, as customers increased socialization. So that was working for Walmart, seemingly, as well. And the company also talking about strength in grocery.

Of course, you know, Walmart, because of its size, because of what it sells really is a snapshot of what we're experiencing and the change year over year. For example, you know, people were stocking up last year. They may not have been going to the stores as frequently. But they were buying a lot of stuff at once. So that moderated, average ticket moderating at Walmart for that reason.

And then that e-commerce number, just to talk about that a little bit more, guys, so that 6% increase, it was definitely a slowdown. But it was better than some analysts had anticipated. Jefferies' Stephanie Wissink, for example, had said that this beat her estimates. What's also interesting is how important it was to the overall. So that e-commerce contribution to the overall comparable sales gain in the US was only 2/10 of 1% of that overall gain. It was 6% a year ago.

So again, just sort of this is a little slice of what we are seeing writ large in this economy. And something else that's interesting as we look again as the microcosm, a very large microcosm of Walmart, is the again the effect of the stimulus checks, which still seemed to be benefiting Walmart. And then some analysts, like Oliver Chen over at Cowin are saying, well, we could now see a transition from the stimulus checks to the beginning of the rollout of child tax credits, which could potentially benefit a Walmart more than other retailers, for example. So that's something to now keep an eye on in the forward quarters as we hear from the retailers.

BRIAN SOZZI: Yeah, no, good point, Julie. And also something to pay attention to in Target reports tomorrow, a couple more-- a few more nuggets here. One, we were just talking about Home Depot's transactions declining 5.8%. For Walmart US, they were up 6.1%, just a little nugget worth mentioning.

And again, I would be surprised to not see the analyst community come out here very soon and defend this quarter from Walmart, especially off of this weakness. I mean, you look at this US business, profit margins up 20 basis points, gross profit margins. July was the strongest month of the quarter. Biggs telling us they have seen momentum into the third quarter.

As long as that US business is accelerating and trending in the right direction, traditionally Walmart's stock has done pretty well. And their guidance for the full year, they lifted it $6.20 to $6.35 a share. The Street was only at $6.02. So that tells me Walmart is looking for a good back-to-school shopping season into September, into October, but also has now planted a flag that their holiday season might be pretty good as well.

MYLES UDLAND: One thing I would say to that, though, Sozzi, is stocks basically at a record high. And all those drivers that benefited Walmart's stimulus, the shift to online shopping, buy online, pick up in store, all those drivers have been known. They're all part of the Walmart story. So what's the next leg? And to see the Street with a muted reaction to the company raising its earnings per share-- and, of course, Walmart's the size of a business that, you know, it's a mature business, right? So it fits the profile that we discussed for the overall market, which is we've seen the multiple on the S&P 500 come down.

And so if you see investors essentially saying, you know, I'm all set with paying, you know-- I think right now Walmart's trading 35 times-ish, trailing 12-months earnings. I'm all good on that. I don't know if I need to add a couple more turns and really taking-- you know maybe taking some off the multiple here on Walmart. So again, it's been a great run for Doug McMillan in the team. But with the stock at a record high, you know, that story becomes a little more difficult perhaps.

BRIAN SOZZI: No, you're right on the mark, Myles. And I'll just quickly add, too, that's going to be the problem with a lot of retail trades that worked well last year during the stock-up boom. Comparisons for the third quarter, fourth quarter are still pretty tough sales margins. So if the stock's not going to move, if you're a Walmart saying back to school as well-- you lift your guidance-- where's the next catalyst? And I think a lot of folks might just say, well, the next catalyst could be lower.

COVID Delta very impacts retail sales into September. Where-- where is that upside catalyst for some of these retailers? I'm not quite sure that is apparent just yet.

MYLES UDLAND: Yeah. I mean, $150 some odd today, right around $150. Stock traded in the $50s per share about six years ago. So you got a triple in six years there. I think you're not really buying-- I think you take that and run if you're buying Walmart. So it's not Nvidia, right? We're not-- it's not-- it's not Lordstown or whatever.