Retail Earnings Week
What to expect when Home Depot, Target, Walmart and other retailers report earnings this week.
Earnings season is rolling right along. This week there’s some key technology companies reporting including Cisco CSCO 0.00%↑ and Applied Materials AMAT 0.00%↑ - but the focus will be on retailers.
Home Depot HD 0.00%↑ Target TGT 0.00%↑ and Walmart WMT 0.00%↑ all report and we’ll likely get a read on the consumer over the past few months, but more importantly the forward guidance.
Today we’ll look at each retailer as the earnings expectations and more importantly the technical setups could create some opportunity this week.
Home Depot (HD)
Earnings: Tuesday May 16
By the time most of you read this Home Depot will already have posted numbers. But here’s the expectations from Wall Street heading into the print.
Q1 Revenue Estimates:
Low: $37.55B
Midpoint: $38.35B (-1.43%)
High: $39.03
Expectations have edged down slightly for HD over the past 6 months. Late last year Wall Street was expecting Q1 revenues to fall closer to $40B.
Lumber accounts for roughly 8-10% of Home Depot’s sales and the commodity is on the verge of experiencing outright deflation.
Headwinds for Home Depot are home builder sentiment remains negative, and new mortgage demand is at a 20+ year low.
The company has telegraphed this somewhat with their 2023 full year revenue guidance coming in flat Y/Y. On the profit side, those are expected to slip a bit because the company handed out raises to frontline employees.
Upside for Home Depot: the company guides to slightly increasing revenue and/or operating margins > 14.5%.
Downside for Home Depot: Downbeat outlook where disinflationary costs aren’t being offset by pricing.
Home Depot Technical Analysis
Doesn’t get any simpler than these types of charts. Home Depot stock has spent only a matter of weeks below a rising trend line for nearly a decade. A pull back to the $260 area also provides multi-year support.
Target (TGT)
Earnings: Wednesday May 17
Q1 Revenue Estimates:
Low: $24.75B
Midpoint: $25.28B (+0.43%)
High: $25.6B
When Target last reported earnings in February the company gave a wide spread on full year comparable sales to either be a low single digit decline or single digit increase.
Wall Street estimates expect roughly 2% revenue growth for FY23 - so the surprise is likely to the downside if Target can’t deliver positive earnings growth.
Most alarming to me with Target has been the deteriorating cash flow. Over the past year, operating cash flow declined more than 50% to a shade over $4B for 2022. The company had $8.5B in cash in 2022 and in January 2023 reported just $2.2B in cash.
Here’s what Target had to say about this rapid decline in cash flow on the last earnings conference call:
In 2022, our business was a net user of cash for the first time in many years. This was driven by a host of unique factors, including unexpectedly low profitability, higher-than-expected CapEx driven by inflation and project costs and a rapid slowdown in inventory turns due to excess inventory and longer lead times in global shipping. This year, we expect each of those factors to become more favorable.
Michael Fiddelke - Target EVP & CFO
Some of these factors aren’t going to turn on a dime. We’ll assume CapEx and shipping should normalize but profitability, the backbone of cash flow, might still be under pressure all year.
Technically Target is in a weird spot. Short term the stock is making higher lows, but it’s on an island. The option market is implying a 7% up/down move for TGT shares the day of earnings. A break below $140 and it will get seriously ugly for Target.
Walmart (WMT)
Earnings: Thursday May 18
Q1 Revenue Estimates:
Low: $145.96B
Midpoint: $147.76B (+5.33%)
High: $150.09B
Walmart fairly routinely comes over the midpoint expectations with the prior 2 quarters being somewhat significant 2.5% - 3.18% upside surprises.
The company usually guides the upcoming quarter and full-year. For Q2 Wall Street is expecting 3-4% top-line growth. For the full year 2.5% - 3% growth - which Wall Street already has priced in with the expectations being for 3.7% growth.
Technically Walmart is in a really interesting spot. I’ve already closed my position in Walmart because for nearly 3 years anytime Walmart stock approaches the $150 mark it sells-off. I subsequently buy south of $135.
I basically caught Walmart shares off the bottom back in May 2022. Having a plan is the most important thing before the stock makes the move is very important.
Could this time be different? Seems doubtful, so I’ll be ready to buy again if the shares sell-off.
Let me know if you have shares of Home Depot, Target or Walmart and your thoughts below in the comments.
Colin Tedards