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US retail outlook brightens with Walmart and new data

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American consumers have kept up their spending despite doubts over the global economy, with Walmart raising its outlook for the US and the commerce department reporting an unexpectedly strong rise in retail sales.

Walmart, long considered a bellwether for middle-class spending, posted a 2.8 per cent rise in second quarter like-for-like domestic sales. It warned of weakness in the Canada and the UK, where executives said Brexit uncertainty had hit non-food sales and prompted markdowns at its Asda chain.

Shares opened up more than 5 per cent on Wall Street.

The figures from the world’s biggest retailer, which has more than 11,300 stores and employs about 2.2m people worldwide, are being scrutinised particularly closely as investors fret about the outlook for the global economy.

Downbeat data from China and Germany this week raised concerns that a global slowdown could spread to US consumer spending, which has supported the domestic economy. And on Wednesday, US department store chain Macy’s issued its second profit warning of the year.

But the commerce department data released on Thursday showed US retail spending rose 0.7 per cent in July from a month earlier, a bigger gain than analysts had expected. The jump was the most in four months and followed a more modest 0.3 per cent rise in June.

Michael Pearce, an economist at Capital Economics, said that the July figures were probably “flattered” by Amazon Prime Day in mid-July. But he said the data still was a rare bit of positivity amid mounting gloom.

“There’s no denying that consumption growth remains strong, which should prevent the weakness in manufacturing and business investment from dragging the economy into recession any time soon,” Mr Pearce said.

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The data could further complicate the Federal Reserve’s rate strategy. Consumer spending is a major driver of economic growth in the US, and the Fed last month cut rates by 25 basis points in what many economists believe is the start of a series of cuts to bolster an increasingly shaky outlook.

Walmart’s results on Thursday pointed to diverging fortunes globally. In the US, a stronger-than-expected quarterly performance prompted executives to increase the outlook for domestic sales. It now expects like-for-like sales in the US to rise “towards the upper end” of a previous range of between 2.5 per cent and 3 per cent.

However, the company reduced expectations for sales growth in its international business, from 5 per cent on a constant currency basis to a range of between 3 per cent and 4 per cent. The company said this was due primarily to “softness” in Canada and the UK, where it operates supermarket chain Asda.

“The uncertainty surrounding Brexit continues to loom,” said Doug McMillon, chief executive. Roger Burnley, Asda’s chief executive, added in a statement that the quarter provided a “case study on the impact the mood of the nation has on UK spending habits.”

Walmart had planned to sell Asda to its rival J Sainsbury, but competition regulators blocked the deal this year. To offset the pressures in the UK, he said Asda was pushing more into its own brand products and improving its online grocery offering.

Despite the more pessimistic forecast for the overseas businesses, the strength in the US was enough for Walmart to lift its group-wide profits guidance. Executives are now targeting a slight decrease to slight increase in operating income for the year. They previously expected a low single-digit percentage decline.

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Across the group, revenue rose 1.8 per cent from a year ago to $130.4bn. The scale of its US grocery business is insulating Walmart from the worst of the pressures in retail, and the company is also investing heavily online to take on Amazon, from voice ordering technology to grocery pick-up facilities that allow shoppers to buy online and collect in person. US ecommerce sales jumped 37 per cent.

These efforts are weighing on gross profit margins, which dipped 46 basis points in the quarter. Net income, however, came in at $3.68bn compared with a $727m loss in the same three months a year ago. Walmart’s earnings of $1.27 per share were better than the $1.22 analysts had pencilled in.

“More than ever, we’re innovating across the business. We’re experimenting with emerging technologies to improve store operations and reduce friction,” Mr McMillon said. “We’re delivering solutions for customers that make shopping with us easier and allows them to add time back in their day.”

Shares in the retailer have risen 18 per cent over the past year compared with a 23 per cent decline in the S&P US retail index.

Via Financial Times

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