In its second quarter earnings report, released Tuesday morning, Walmart mostly had good news to share with investors. Same store sales jumped 9.3%, driven by strong performance in food and general merchandise sectors such as home improvement, sporting goods, outdoors and electronics. Revenue rose 5.6% to $ 137.7 billion, beating estimates at $ 135.5 billion, while adjusted earnings per share rose from $ 1.27 to $ 1.56, well in ahead of Wall Street consensus at $ 1.25.
Investors cheered the results, pushing the stock up 6% pre-trade, but shares ended the session down 0.7%, one of the things that hampered investors in the report. On several occasions in its presentations, management highlighted the impact of the government’s stimulus measures, saying federal distributions, many of which ended in July, have given it a positive wind. Walmart’s comparable sales slowed to about 4% in July as stimulus payments began to decline, management said.
CEO Doug McMillon appeared to believe the government stimulus was the biggest growth driver for the quarter, saying, “I feel like the order of things, the order of the winds that have impacted the business were one, one stimulus, two, eat at home, three, be at home and whatever you wanted to do to make the inside and out more enjoyable. ”
Given Walmart’s size and influence on the economy, this statement could indicate that an economic downturn, at least in consumer-oriented sectors, is underway without another congressional stimulus bill. Other data seems to confirm these fears.
A V shape or a W?
The long-promised V-shaped recovery has arrived, at least to some extent. the S&P 500 recovered to its all-time high on the same day Walmart announced its results, six months after peaking in February before the coronavirus pandemic hit. Likewise, after falling in March and April, retail sales in the United States surged in May and June, and by July, overall retail sales, including food services, had fully returned to $ 536 billion. dollars, a record for a single month.
But this V-shaped recovery does not reflect the underlying state of the economy. The unemployment rate is still in double digits, and about 1 million Americans apply for unemployment insurance each week, a higher rate than at any time before the pandemic. Federal pandemic unemployment compensation expired last month and, with it, the weekly $ 600 checks that were being distributed to 20 to 30 million unemployed Americans.
As a result, American consumers have a lot less money to spend this month. According to Treasury Department data, in the first 17 days of the month, federal unemployment benefits rose from $ 60.8 billion in July to $ 29.5 billion in August. Extrapolating that data to the end of the month means Americans will lose nearly $ 60 billion, or more than 10% of monthly retail spending, assuming Congress does not act. Meanwhile, other funding, like the paycheck protection program, is also running out, leading to layoffs and business closures.
In addition to essentials, much of that stimulus money had been spent on discretionary items such as home improvement items, smartphones, and restaurant take-out. Consumer spending accounts for 70% of U.S. gross domestic product, and when a retailer like Walmart says there’s a clear headwind in the end of the government stimulus, it almost certainly affects the majority of businesses in the world. contact with consumers.
Other data points also show a slowdown. According to a report from Indeed, the world’s largest job board, job vacancies in the United States essentially leveled off in August after rebounding sharply in recent months, and last week has marked the first time the gap between job postings in 2019 and 2020 had widened since April, job postings in the week ended August 14 were 20.3% lower than the same week in 2019, compared to 18.1% the previous week.
What is clear
Predicting what will happen with the stock market in the next few months is a crazy task, as the volatility of the past few months has shown, but investors should take Walmart’s comments on the government’s stimulus to heart. Without another round of emergency funding from Congress, retail outlets, restaurants, and other businesses that depend on consumer spending are likely to see a significant drop in spending, which means what appears to be a full recovery. V-shaped in the retail industry. and the stock market could be a mirage.