Walmart, Home Depot show consumer still resilient: Analyst

Walmart (WMT) saw major upsides to consistent sales growth, as outlined in its fourth-quarter earnings beat. Home Depot (HD), on the other hand, cited sales declines and a weakened full-year outlook in its latest earnings results. Are the earnings performances of these major retail chains indicative of any trends seen in the US consumer?

D.A. Davidson Managing Director and Senior Research Analyst Michael Baker joins Yahoo Finance to discuss consumer resiliency seen across the past year.

"It seems like the idea of a recession is a little less on the table now than it was because consumer spending was pretty strong throughout 2023. Slowing certainly from the pandemic years but held in pretty strong," Baker explains. "Walmart had a pretty strong holiday season. Home Depot remains negative and that's more a function of, I think, housing trends but less negative than they have been. We're sort of leveling off... in terms of consumer spending."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- We've also got some insight into the state of the consumer this morning with Home Depot and Walmart results out before the bell. Now, we heard some consistent themes from both companies that we heard throughout 2023. A more choice for consumer pulling back from big ticket purchases but still consistently spending. For more on this, we turn to Michael Baker-- D.A. Davidson managing director and senior research analyst. Good to have you on the show here.

So walk us through what we're seeing and what these earnings are telling us about the state of the consumer and what they're still willing to spend on.

MICHAEL BAKER: Yeah. The consumer is resilient. And in fact, maybe even a little bit better than we thought a year ago. If you recall about a year ago, there were concerns that 2023 was going to be a recessionary year. I think the odds were from a number of economists that we would fall into a recession. And of course, that hasn't happened now. Who knows what happens in the future?

But it seems like the idea of a recession is a little bit less on the table now than it was because consumer spending was pretty strong throughout 2023. Slowing certainly from the pandemic years but held in pretty strong, Walmart had a pretty strong holiday season. Home Depot remains negative. And that's more a function of, I think, housing trends. But less negative than they have been. So we're sort of leveling off, I think, in terms of consumer spending.

- In terms of-- from a stock perspective, Michael, is it still about those names that are most diversified like a Walmart that really are best positioned in this environment? Yes, the consumer is resilient. But becoming a little more cautious, you look at a name like Walmart versus a Home Depot where there is a bit of a pullback in spending, especially on home upgrades.

MICHAEL BAKER: Yeah. I think it's just being where the consumer is. And right now, the consumer is not spending as much on the home. So that's a much more difficult place for any retailer. But the consumer is still spending on basic everyday needs. Walmart is well positioned there. And in fact, probably better positioned now than they have been in the past several years. And we see that in their share gains.

Not only are they growing their Comp sales but they're growing their Comp sales better than industry trends. So Walmart has done a lot to position themselves. We're seeing it a lot with higher end consumers to position themselves as a good option for consumers with a little bit more spending power than they had in the past. A lot of that is driven by convenience. And that convenience is driven by their improving online capabilities.

- And so Michael, I mean, we are seeing them, especially when it comes to Walmart, spending on the groceries and the essentials. Pulling back, though, on some of the discretionary spending. Is that a trend that you expect to continue regardless of what the Fed does?

MICHAEL BAKER: I think so, but again, I think, it'll sort of moderate in 2024. Now, Walmart, their trends in general merchandise as an example, were negative. But units were actually up. A lot of that negativity is because they are seeing deflation in those general merchandise categories. So as we're seeing that unit trend get better, that does give us hope. Now, we do think the mix for 2024 will continue to skew towards food and consumables but maybe a little bit less so than it has been as we think.

First of all, we're going to get a little bit less inflation, still inflation in food, but we are seeing disinflation. So that'll be a little bit less impactful. And we think some of the remodels and the like that they're doing in their stores are going to drive better unit trends in general merchandise sales.