Walmart, Home Depot kick off retail earnings this week

After benefitting from a pandemic-era shopping spree, retailers are preparing for a reality check.

Walmart and Home Depot will kick off retail earnings season Tuesday by sharing holiday-quarter results. Other big-name retailers will follow, including big-box players like Target and Best Buy, and mall staples like Macy’s and Gap.

The companies’ reports will come as recession fears cloud the year ahead. Americans are more worried about inflation now than they are about Covid. People are choosing to spend more on dining out, traveling and other services while cutting back on goods. Higher interest rates threaten the housing market.

A slowdown in sales growth also seems likely after the sharp increases of the past three years.

For investors, the end of retail’s sugar high brings a mixed picture. Companies may share modest sales outlooks. Yet healthier profit margins could be a silver lining, as freight costs fall and retailers have less excess merchandise to mark down. Plus,walmar companies may have more cautious spending plans, such smaller inventory orders and slowed-down hiring. That could boost profit margins, even if consumers don’t spend as freely.

“The world is focused on top-line momentum,” said David Silverman, a retail analyst at Fitch Ratings. “So many market participants are focused on what revenue is what revenue is what revenue is.”

But, he added, “it’s the operating profit that could bounce back nicely from a difficult 2022.”

Silverman said retailers’ strategies have flipped from a year ago. Then, they bet on sky-high sales becoming the new normal and made riskier bets, from placing bigger orders to paying extra to expedite shipments. That hurt companies’ margins, as unsold merchandise wound up on the clearance rack and costs crept up, along with sales.

Already, retailers have gotten a dose of reality. Walmart, Target and Macy’s are among the companies that have spoken about a more careful consumer.

Several retailers already previewed holiday results. Macy’s warned that holiday-quarter sales would come in on the lighter side of its expectations. Nordstrom said weaker sales and more markdowns hurt its November and December results. Lululemon said its profit margins would be lower than anticipated, as the athletic apparel retailer juggles excess inventory.

Industry-wide holiday results fell below expectations, too, according to the National Retail Federation. Sales in November and December grew 5.3% year over year to $936.3 billion, below the major trade group’s prediction for growth of between 6% and 8% over the year prior. In early November, NRF had projected spending of between $942.6 billion and $960.4 billion.

Retail leaders have looked closely for clues, as they gear up for the coming fiscal year. (Most retailers’ fiscal years end in January.)

Macy’s CEO…