The big brick-and-mortar retailers stepped up to the earnings deck in the past two weeks – we heard from Walmart Inc. (WMT) and The Home Depot, Inc. (HD) last Tuesday and Target Corporation (TGT) this morning. Wall Street was watching these earnings reports very closely following the shocking January retail sales report released on February 15.
Retail sales surged 3% in January, well above economists’ estimates for a 1.9% increase. This was also its largest increase since March 2021. Excluding autos, retail sales climbed an impressive 2.3%, which beat projections for a 0.9% rise. In the past 12 months, retail sales rose 6.4%, which is perfectly in line with CPI inflation. An 8.7% increase in Social Security checks to 70 million recipients likely helped to boost consumer spending, as well as positive seasonal adjustments.
So, in today’s Market 360, let’s review the latest round of retail earnings, including Walmart and Home Depot’s cautious outlooks that spooked investors. Plus, I’ll share the key to profits during earnings season…
Let’s start with Target.
Target Corporation (TGT) – Announced Tuesday, February 28
Target posted its fourth-quarter earnings this morning before market open and the results came in better than expected.
For full-year 2022, Target reported earnings per share of $5.98, a 57.5% decline from earnings per share of $14.10 in 2021. This did, however, come in higher than earnings expectations of $5.54 per share. Revenue grew to $109 billion, up $3 billion from $106 billion in 2021. This also beat analysts’ revenue expectations of $108.4 billion.
For its fourth quarter, Target posted earnings per share of $1.89, a 41% decrease from earnings per share of $3.21 in 2021. Revenue grew 1.3% in the fourth quarter to $31.4 billion, driven by a 1.2% and 8.4% increase in sales growth and other revenue, respectively.
Looking ahead, the company is a little cautious. Chairman and Chief Executive Officer Brian Cornell stated the following:
We’re planning our business cautiously in the near term to ensure we remain agile and responsive to the current operating environment… as we plan for the year ahead, we will continue to make robust capital investments and pursue efficiency opportunities in support of our long-term growth.
The company also guided for comparable store sales to be between a single-digit decline to a single-digit increase. The operating income margin rate is anticipated to be between 4% and 5%. First-quarter earnings and adjusted earnings per share are projected to range from $1.50 to $1.90.
In addition, Target noted that over the next three years, it expects its operating income margin rate to break back above its pre-pandemic rate of 6%. Depending on how quickly it takes for consumer demand to bounce back, Target anticipates it could reach the 6% operating income margin rate as soon as fiscal year 2024.
Walmart Inc. (WMT) – Announced Tuesday, February 21
For the fourth quarter, Walmart reported sales of $164.0 billion and earnings of $1.71 per share. Analysts had expected sales of $159.7 billion and earnings of $1.52 per share. Walmart also raised its annual cash dividend to $2.28 a share, up from $2.24 a share last year.
For its fiscal year 2023, the company reported adjusted earnings of $6.29 per share on $611.3 billion in revenue, which represented a 2.6% annual earnings decline and a 6.7% annual revenue growth.
However, future guidance was relatively lackluster, causing WMT shares to tumble. For its first quarter in fiscal year 2024, Walmart expects consolidated net sales to increase between 4.5% and 5%. Adjusted earnings are anticipated to be between $1.25 and $1.30 per share. For full-year 2024, Walmart predicts adjusted earnings per share of $5.90 to $6.05 and consolidated net sales to increase between 2.5% and 3%.
Chief Financial Officer John David Rainey also commented:
Turning to guidance, as we sit here today, we find ourselves in a similar position to each of the last three years, where there is a great deal of uncertainty looking out over the balance of the year. While the supply chain issues have largely abated, prices are still high and there is considerable pressure on the consumer. As such, our guidance reflects a cautious outlook on the macro environment.
The Home Depot, Inc. (HD) – Announced Tuesday, February 21
Home Depot provided weak fourth-quarter earnings that missed Wall Street’s expectations. Fourth-quarter revenue grew 0.3% year-over-year to $35.8 billion, which just missed estimates for $35.9 billion. The last time Home Depot had missed analysts’ revenue expectations was in November 2019. Fourth-quarter adjusted earnings came in at $3.30 per share, up from $3.28 per share in the fourth quarter of 2021.
For its fiscal year 2022, the company posted net earnings of $17.1 billion, or $16.69 per share, compared to net earnings of $16.4 billion, or $15.53 per share in fiscal year 2021.
The company’s forward-looking guidance was also gloomy: Sales growth is expected to be approximately flat compared to fiscal 2022 and earnings per share will be mid-single digits.
Executive Vice President and Chief Financial Officer Richard McPhail noted:
The way that we set our target and our guidance for the year was to first start with the assumption of flat consumer spending. And then, with respect to the goods sector of the economy, as I’ve said over the last seven quarters, we’ve seen that shift across the consumer economy from goods to services. So we would anticipate this would put slight pressure on our market. And then we look to overcome that by taking share in the manner that we’ve done consistently over the past several years. So we’re targeting flat.
Given Home Depot’s earnings results, I’m very curious as to what Lowe’s Companies (LOW) will have to say tomorrow. It is the second-largest home improvement retail company (Home Depot takes the number-one spot) – and it has a history of falling short to Home Depot.
Let me share a quick preview of what analysts are expecting…
For the fourth quarter, analysts are projecting earnings per share of $2.22 and sales of $22.73 billion, compared to earnings per share of $1.78 and sales of $21.3 billion in the fourth quarter of last year. So, earnings are expected to grow 24.7% year-over-year, while sales are expected to rise 6.7% year-over-year.
Positive Guidance Remains Key for Big Profits
Now, as my longtime Market 360 readers know, guidance is a very important piece to the earnings puzzle. So, I’m not very bullish on the big retailers right now. As we discussed today, while some beat analysts’ expectations, they all provided weak forward-looking guidance.
The reality is that fundamentals still matter, which is why it’s important to focus on stocks with strong fundamentals, i.e., companies that are consistently growing their sales and earnings and posting positive forward-looking guidance.
Fortunately, at Growth Investor, we’ve taken steps to align our Buy List to prosper in the current environment, as we’ve loaded up on companies with accelerating earnings and sales momentum.
And much of the strength that my Buy List stocks have exhibited this year can be attributed to earnings. The fact is, my Growth Investor stocks have achieved wave-after-wave of double-digit earnings growth. And I don’t expect that growth to slow anytime soon: My Growth Investor stocks are characterized by 38.9% average annual sales growth and 283.8% average annual earnings growth.
I should add that my Buy List stocks are only trading at 7.6X median trailing earnings, and our average dividend yield is 3.93%. So, low price-to-earnings ratios and strong dividend growth coupled with positive sales and earnings should support my stocks in the upcoming months.
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