Market Insider

Walmart's best sales in a decade show US consumer may be strongest in years because of the tax cut, jobs growth

Key Points
  • Walmart's best growth in comp store sales in a decade comes as the U.S. consumer is showing some of the best signs of strength since the recession.
  • Retail sales jumped in July, but so did the sales performance at retailers as consumers not only went shopping but spent money on travel and dining out.
  • Economists say consumer spending is being helped by the tax bill and also the fact that U.S. job creation remains strong, even as unemployment dipped below 4 percent.
A customer puts a bag of purchases into a shopping cart at a Walmart Store in Los Angeles.
Patrick T. Fallon | Bloomberg | Getty Images

The American consumer is back, and so is Walmart, at least for now.

Walmart stock surged more than 10 percent after the company reported fiscal second-quarter earnings and sales that beat estimates and the best comparable sales growth in a decade. Sales were boosted by groceries, apparel, seasonal merchandise, and its e-commerce sales popped 40 percent.

Walmart's bullish sales report follows a surprise uptick in July retail sales, reported by the government Wednesday. U.S. retail sales jumped a half percent in July, or 6.4 percent annually, after a 0.1 percent dip in June, but that followed solid spending earlier in the spring. The U.S. economy in the second quarter, grew at 4.1 percent, the best pace in four years, and the consumer's strength is a positive omen for third-quarter growth.

Walmart, once the undisputed icon of American consumerism, has taken a back seat to Amazon, as its e-commerce business transformed the retail landscape over the last decade, forcing brick-and-mortar stores to adapt or die. Other retailers also had upbeat reports this week, including Home Depot

Analysts credited Walmart's success in the latest quarter with its change in online strategy as well as the solid consumer, armed with the proceeds from tax cuts and more confidence overall. Walmart U.S. CEO Greg Foran said the retailer is attracting new customers as it expands online groceries, but also existing customers are adding more to their carts. He said the sales are growing across the country, with no one particular market standing out, a solid foundation for the company's initiatives.

'We have more paychecks'

"There's no question that the consumer is out spending. One of the things we saw in retail sales was even though we don't have more wage growth, we have more wages. We have more paychecks. That critical mass is showing up and actually spending," said Diane Swonk, chief economist at Grant Thornton. "We have very robust spending on discretionary items. They're going out to dinner, and we know the Fourth of July holiday was one of the most traveled on record."

Walmart sales at U.S. stores open at least a year rose 4.5 percent, well above the 2.4 percent expected by analysts. Walmart had sales for the quarter ended July 31 of $128 billion, a gain of 3.8 percent.

"I think the tax cuts are certainly a factor. You just saw strong economic growth in the quarter. The U.S. economy is doing pretty well, and that's going to be reflected in numbers like Walmart's. It's about time," said Paul Hickey, co-founder of Bespoke. "Walmart is all over the country, it's middle America. I think it's a good representative of the consumer. I think we're seeing U.S. growth has been consistent. We're seeing the employment trend continues to be positive. You're seeing people come back to the workforce, the kind of thing is going to be great for Walmart."

Bespoke said the more than 10 percent gap up in Walmart stock early Thursday was the most positive gap open after earnings since at least 2001. The stock previously gapped up more than 5 percent in response to earnings in May 2016 and November, 2017. The stock had gapped down 7 percent in February in its largest decline in reaction to earnings since 2001. Walmart traded slightly positive on the year – up 0.2 percent - Thursday morning, after lagging. That compares with Amazon's 62 percent gain for the year so far. In February, its stock was slammed after it reported a slowdown in e-commerce sales in the fourth quarter.

Walmart said its earnings for the full year would reach $4.90 to $5.05, from a prior target of $4.75 to $5. It also said that its investment in Flipkart, an Indian e-commerce company would reduce full-year earnings by 25 to 30 cents per share.

Bernstein analyst Brandon Fletcher said it will not be easy to meet that guidance. "It takes a lot of work to get to the adjusted EPS, and we think it's reasonable to assume there are other bad days in [Walmart's] near future as they continue to clean up their int'l portfolio and eCommerce investments," he wrote, in a note. "Grocery and apparel showed strong growth, and costs were under control making it one of the strongest quarters for [Walmart]. While we are excited to see general growth in eCommerce, our small raise in guidance is due to this growth being indicative of a strong economy rather than [Walmart] fixing its core problems."

Missing wage growth

The consumer trend should help Walmart, and Swonk said its evidence is in the type of spending. For instance, in the July retail sales report, spending at restaurants and bars was up more than 9.7 percent year over year, even though spending on gasoline was up 22 percent.

"You have a consumer that's feeling better," she said. "The U.S. consumer won't be as strong in the third quarter as the second quarter but they're really solid. This is a consumer that has the means. ... The problem remains a lack of wage increases.

"The more important thing is we're generating more paychecks, an increase in aggregate income and that can add to inflation," she said. Consumer spending is off to a good start in the third quarter after a 3.5 percent jump in the second quarter. "First quarter was a half percent ... so it averaged slower going in the first half than it did in all of 2018. It was a bit of catch-up on what was a dismal first quarter. the good news is we've got some momentum now."

Walmart CEO Doug McMillon said traffic in stores increased by 2 percent and the average customer basket cost also went up. He said the company is working on its e-commerce offerings to bring more brands to the site and raise margins.

"Customers tell us they feel better about the current health of the U.S. economy as well as their personal finances. They're more confident about their employment opportunities," said McMillon in a statement.