US retail sales posted their largest increase in eight months in October, with the value of purchases up a forecast-beating 1.3%, demonstrating the US consumer is holding up well despite rising rates and high inflation, supported by the government’s pandemic stimulus package.

Yet a frenetic third quarter earnings season gave fresh clues about the health of the US consumer heading into Christmas. Shoppers are now cutting back on non-essentials, suggesting a bleak holiday season in prospect for purveyors of discretionary categories like clothing, homewares and electronics.

WHY WALMART IS WINNING

Walmart (WMT:NYSE) and Target (TGT:NYSE) both sell food, clothing, home goods and kitchen appliances, but the former generates a far larger slice of sales from groceries than the latter. This is helping Walmart lure in cash-strapped shoppers as inflation squeezes budgets and partially explains the companies’ diverging outlooks.

Walmart’s forecast-beating third quarter results (15 November) showed US like-for-like sales up 8.2% thanks to further grocery market gains and the retail behemoth also raised full year operating earnings guidance.

Brian Cornell-bossed Target’s massive third quarter earnings (16 November) miss ahead of Christmas rattled Wall Street. Adjusted earnings per share of $1.54 was almost 50% down year-on-year and Target lowered fourth quarter guidance based on ‘softening sales and profit trends that emerged late in the third quarter and persisted into November’, with shoppers pruning back spend on clothing, electronics and home goods.

Worryingly, Cornell warned sales and profit trends softened ‘meaningfully’ in the latter weeks of the quarter with shopping behaviour ‘increasingly impacted by inflation, rising interest rates and economic uncertainty’.

HOME IMPROVEMENT HOLDS UP

Robust quarterly earnings from Home Depot (HD:NYSE) on 15 November and Lowe’s (LOW:NYSE) on 16 November showed the home improvement duo holding up well, despite weakening house sales and prices amid a rise in mortgage rates.

American homeowners still have the cash for renovations judging by Home Depot’s US comparable sales growth of 4.5%, and the Ted Decker-led retailer also reaffirmed its 2022 guidance. Lowe’s actually lifted its full year 2022 outlook after US ‘comps’ ticked up 3% amid strong sales to professionals and ‘improved DIY sales trends’.

Elsewhere, Macy’s (M:NYSE) raised (17 November) its annual earnings forecast after third quarter sales and earnings topped Wall Street expectations, though the department store left revenue guidance unchanged given a tougher festive sales backdrop, having seen a recent drop in sales. 

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