Market Overview

18 November 2020

Strong Q3 Financial Results of Retailers Met by a Fresh Limitations' Reality

This week, the global markets are still forming a contradictory movement but with a rather stable sentiment. October's nationwide retail sales data from the United States, which were released on Tuesday, may hardly be called a determinative factor, but the figures left a negative trail of smoke. Despite the excellent third quarter financial reports of big store chains like Walmart discount hypermarkets and groceries or Home Depot, a large home improvement retailer, their shares were trading lower. 

U.S. retail sales rose by 0.3% in October but missed average expectations, as economists polled by Reuters forecasted it would gain 0.5%, also with  a pace of September officially revised from the initial 1.9% value to 1.6% only. The core sales measure, excluding cars, may reflect a broad-based consumer spending profile, showed a change of 0.2% compared with as much as 1.2% just a month ago. A cloudy part of news is that the data could slow down further in November, even despite Thanksgiving Day sales next week, as a potential effect of Black Friday could be significantly restrained by spiralling new COVID-19 infections cases with mild quasi-lockdown versions in many states and in Europe. The stores would not benefit from the careful behaviour of citizens in crowded selling floors and also the lack of household income may push families to delay some expenses for online shopping too as millions who are unemployed or underemployed are waiting for the suspended government financial support. 

A fresh JPMorgan's survey of credit and debit cardholders showed a broad decline in spending through November 9, with big drops in states where COVID-19 was spreading fast. "There is conflict for the market between the near-term direction to the economy, which is troubled with the very high COVID-19 rates and the future for the market, that's which vaccines could provide an end to the restrictions," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey, which is one of the several state which is imposing fresh antiviral limitations.

While commenting on retail sales data, the Chairman of the Federal Reserve Bank of Atlanta, Raphael Bostic, noted that compared to the strong recovery that began in May and was observed in the summer, the statistical data in the fourth quarter may be weak. Jerome Powell, the head of the U.S. Federal Reserve, added that the increase in the incidence of coronavirus will pose a serious risk to the economy in the coming months. He also noted that it is too early to say whether the appearance of the vaccine will change the forecasts.

The unemployment subsidy, which was a part of the first relief package, has lapsed for millions, and more people are going to lose benefits next month when a government-funded program expires for the self-employed and gig workers who are not qualifying for the regular state unemployment programs. A program for people who have exhausted their six month period of eligibility for state aid will also expire at the end of December, if the sitting White House administration will not suddenly interfere. The second big rescue package is almost impossible until clarity is set to be achieved with the transfer of power that comes in January. The U.S. Senate majority leader McConnell, a Republican, said on Tuesday that the next few days might show whether Congress could agree on a bipartisan funding package saying that the Senate still wants it to pass but it is all words again, not money.

On such a specific background, Walmart posted a bigger-than-expected, very positive increase in quarterly same-store sales and beat average profit expectations on Tuesday. Sales of American-located stores that have been open for at least a year rose even by 6.4% over the last three months, ending on October 31, as analysts’ polls estimated an increase of 4.16% on average, according to Refinitiv. Walmart U.S. e-commerce sales grew as much as 79% with strong results across all channels which helped to boost the network profit, an adjusted equity per share (EPS) came at $1.34 vs generally expected $1.18 or so, on $134.7 bln revenue. It is less than $137.7 bln in Q2 but almost repeated its $134.62 level that was reported from January till March 2020. So, the surge in demand for essentials was seen at the peak of the stay-at-home lockdowns when many consumers were relying on Walmart's same-day delivery options to buy all kinds of staples has been seen to be carried into the second half of the year.

"We think these new customer behaviours will largely persist and we're well positioned to serve customers with the value and experience they're looking for," CEO Doug McMillon said in a statement. An early start to the holiday season has helped Walmart give customers the "opportunity to come to stores when they aren’t as crowded as they typically would be on a one-day Black Friday type of event," Chief Financial Officer Brett Biggs told Reuters. But this may mean a decline in the consumer boom during the second part of November.

Walmart management also admitted it incurred about $600 million in additional COVID-19 expenses that included higher wages for warehouse workers and bonuses for store employees, as well as spending more on cleaning facilities. Before, the retailer had already recorded about $1.5 billion in such expenses just in the second quarter. Executives said on a call with investors that they expect the COVID-related costs to continue for "some time, along with some general global uncertainties." It seems that most of market investors so far have preferred to focus their attention on this expenditure aspect of the financial balance, at least as a first response. After Walmart's stocks rose more than 28% over the course of the year, the price exceeded $153 per share at some moments on Monday, but it started around $150 on Tuesday just after the financial data release, then tried to go down to $149.25 and quickly soared above $153 again, but finally closed the day below $150.

However, if prices slide lower to adjust during the current week or before Thanksgiving Day, a more likely scenario may be increased demand, which could lead to Walmart shares even breaking their  previous annual peaks. Dumping some of the vaccine euphoria doesn't mean that it would just disappear, so that some investment plans could rather be delayed, not cancelled. By the way, in a framework of widening investments in e-commerce, the retailer in September launched its subscription service Walmart Plus, the membership costs $98 per year and offers services such as unlimited free delivery, fuel discounts and no checkout lines. It could even become a partial rival to Amazon.com's Prime subscription, which just includes benefits like free shipping and streaming services.

Home Depot which offers its customers an assortment of building materials, home improvement, lawn and garden, decor products also slipped 2,54% on Tuesday despite topping Wall Street's average forecasts. It reported a Q3 profit of $3.43 bln, or $3.18 per share (EPS), on revenues of $33.54 billion, as analysts had expected EPS of $3.06, with sales of $32.04 billion. Moreover, the top and bottom lines grew 23% and 24%, respectively, from the year-ago quarter. During the earnings call, the company said some of its temporary employee remuneration programs implemented in the wake of the health crisis will become permanent wage increases, resulting in $1 billion of additional expenses per year. As of November 18, Home Depot stock offers a 2.15% dividend yield, and trades 27% higher since the start of the year, but the shares have lost 5.28% over the last month. It all came just one day after the company announced plans to acquire HD Supply – a former maintenance, repair, and operations (MRO) business it spun off in 2007. This $8 bln deal helps position the retailer as a leader in the commercial services market. “That is a huge opportunity for the Home Depot to continue to grow, not only on the MRO side, but as we build relationships with customers on the MRO side, we build relationships to be able to participate in capital refreshes of those facilities as well, which is something that we’re pretty focused on,” CEO Craig Menear said.

At the same time, Amazon shares jumped 1.2% to $3182 per share just after Wall Street's open yesterday as it launched an online pharmacy for delivering prescription medications in the United States. Some specific drug retailers immediately dropped, such as Walgreens Boots Alliance tumbled 8.7%, while CVS Health Corp fell 7.5% on the news. But later the price of Amazon also lost its intraday heights just to slip to $3135. At some point, these unbalanced movements caused an additional volatility in the major S&P 500 composite index, but the high tech Nasdaq's losses were limited by a 12% jump in Tesla stocks after the announcement that the electric-car maker will be added to the benchmark S&P 500 in December. Both U.S. indexes quickly overcame the temporary embarrassment to restore their status quo, so that the American stock exchanges were trading generally higher on average if compared with last week's values, and the major European indexes seemed to take a short time-out and quietly held gains near the semi-annual tops.


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.


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