Walmart’s magnifying mirror

As the first-quarter earnings season draws to a close, Walmart, one of the last remaining stock market heavyweights, went through the process last Thursday. In addition to significantly higher-than-expected earnings per share and sales revenue, which sent the US retail giant’s share price rocketing, the publication of these results abounds in lessons regarding the US economy.

First of all, about inflation. The increase in the number of customers shopping at Walmart is partly due to the aggressive policy of price cuts and regular promotions pursued by the chain over the last few months, while households are still affected by the cumulative price rises of recent years. Of course, Walmart is known for its low-cost positioning, but after several quarters in which companies have blithely taken advantage of the strength of demand to offset – and even outpace – rising costs, this intensified effort on prices bodes well for disinflation to continue.

Secondly, about the health of US consumption. Intuitively, we take it that the Group’s solid revenue growth indicates that consumer spending is doing wonderfully well. The reality is more nuanced. David Rainey, Walmart’s Chief Financial Officer, said that spending had increased on essential products, mainly food and hygiene, to the detriment of discretionary spending, such as home furnishings and electronics. This echoes recent macroeconomic figures published which point to weak retail sales, scant growth in real incomes and inflation concentrated in categories of unavoidable expenditure – car insurance, financial expenses, medical services – automatically reducing households’ capacity for discretionary consumption.

Another significant fact: is that Walmart said it had gained market share during the quarter, mainly due to an increase in higher-income customers (those on more than USD 100,000 a year). While this partly reflects the Group’s repositioning strategy, with the recent launch of premium product lines, that is probably not the only explanation. The arrival of new, more affluent customers has not resulted in an increase in the average ticket. It seems that for wealthier households, the search for more affordable prices has also become a reality. They may not be completely underwater, but American consumers are undoubtedly experiencing more difficult times.

Once again, this bears out certain macroeconomic data. Firstly, according to the latest calculations by the San Francisco Fed, the surplus savings accumulated during the pandemic have now been used up, and the balance has even turned negative. In other words, US households now have less savings than the trend prior to Covid suggested. Secondly, payment problems on credit cards and car loans continued to rise rapidly in the first quarter. In both cases, this is well above pre-Covid levels, with a return to rates similar to those of the early 2010s, which bore the scars of the 2008 crisis. With real incomes showing little growth, other factors fuelling consumption – credit and savings – seem to have been exhausted.

The shareholders of Walmart, and those of its competitors such as Dollar Tree, Costco and Dollar General, probably have little to worry about. Their business model makes them particularly resilient to the cyclical nature of the economy, and their cut-price policies enable them to benefit from a carry-over effect when spending comes under pressure. But this bright outlook for the sector could herald a less rosy future for the US consumer.

Final version of 17 May 2024 – Enguerrand Artaz, Fund Manager, LFDE