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Walmart and Home Depot ease fears of recession even as inflation persists

Two of the largest US retailers have allayed recession concerns and report resilient consumer spending, even as sharp food and fuel inflation weighs heavily on their customers.

Walmart, the world’s largest retailer, said it had seen a glimmer of improvement in recent weeks, despite its most price-sensitive shoppers switching to cheaper groceries. Home Depot, the DIY chain, said home improvement spending was “incredibly high,” with activity accelerating in recent weeks.

Two Walmart profit warnings since May had baffled investors looking for clues as to how U.S. consumers have adapted to historically high inflation and rising interest rates.

But the retailer on Tuesday reported stronger sales and gains than expected in the three months to July and forecast a smaller decline in full-year earnings than it warned investors about three weeks ago.

“We ended the quarter strongly,” said John David Rainey, Walmart’s new chief financial officer. Traffic to shops increased in July and August, he added, and the back-to-school season had “started well.”

Home Depot reported its highest-ever quarterly sales and revenue, saying consumers were spending on home improvement despite high inflation and mortgage rates.

Chief executive Ted Decker told analysts Tuesday that there were still many “countercurrents” in the US economy, but the savings rate, labor market and wage growth remained strong.

Walmart’s reported earnings of $1.88 per share for its fiscal second quarter were 23 percent higher than last year, surpassing analyst consensus estimates of $1.62 per share.

However, after an 8.4 percent increase in revenues to $153 billion, the numbers showed the effect of inflationary pressures on Walmart consumers, many of whom have cut back on clothing and general merchandise as their gas and grocery bills have risen.

Lower-income consumers moved from processed meats to cheaper hot dogs, canned tuna and chicken, Rainey said. However, Walmart CEO Doug McMillon added that the company was gaining market share as higher-income buyers turned to its stores and e-commerce services to save money.

As it warned in July, inflation-driven shifts in consumer spending left Walmart with oversupply, especially in apparel. Markdowns to clear that stock contributed to a gross profit margin decline of 132 basis points in the quarter.

Walmart’s inventories hit $60 billion at the end of July, up 25 percent year-over-year, in part due to inflation and efforts to avoid the “lean” inventory position it faced during last year’s holiday season.

Rainey said Walmart had cleared out most of its seasonal stock for the summer, but still had excess inventory in electronics, homeware and sporting goods.

Walmart now expects a 9 to 11 percent decline in full-year operating income, compared to last month’s expectation that investors would expect a fall of 11 to 13 percent.

That outlook was based on Walmart’s expectation that the consumer environment in the third and fourth quarters of the fiscal year “would be very similar to [the second quarter]McMillon said.

Investors welcomed the improved outlook from two of the largest U.S. retailers, leading Walmart shares to rise 5.1 percent and Home Depot shares 4.1 percent higher on Tuesday.

The optimistic mood stimulated the shares of peers. Retailer Target and DIY chain Lowe’s, which report profits Wednesday morning, rose 4.6 percent and 2.9 percent, respectively.

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