WMT - Wall Street Lunch: Walmart Warns On Retail Spending Pricing

2023-11-16 11:45:00 ET

Summary

• Walmart's full-year profit guidance brings out bears, company warns on U.S. consumer trends.
• Alibaba posts Q2 revenue miss; Palo Alto fell after lowering 2024 billings forecast.
• Goldman Sachs takes inspiration from Taylor Swift for its 2024 stock market forecast.

Listen below or on the go on Apple Podcasts and Spotify

Walmart is cautious on the consumer but says falling prices may be ahead. (0:15) Alibaba scraps cloud business spinoff . (2:30) Goldman channels Taylor Swift for its 2024 market outlook. (3:58)

This is an abridged transcript of the podcast.

Our top story so far

Walmart ( WMT ) sounded a warning on retail spending and pricing power as it issued results today.

Due to its sheer size, Walmart’s performance is often considered a proxy for the U.S. consumer. And its full-year profit guidance brought out the bears.

For the numbers, the retailer reported total U.S. comparable sales up +4.9% in fiscal Q3 to top the consensus estimate for up +3.4%. Looking ahead, Walmart raised its FY24 sales guidance to +5.0% to +5.5% vs. a prior range of +4.0% to +4.5%. But the adjusted EPS outlook of $6.40 to $6.48, while above the prior outlook, missed consensus mark of $6.50.

In an interview following the release, CFO John Rainey said: "Halloween was good overall. But in the last couple of weeks of October, there were certainly some trends in the business that made us pause and kind of rethink the health of the consumer."

But CEO Doug McMillan said that while the company would like to see more and faster pockets of disinflation, falling prices may actually be on their way.

“In the US, we may be managing through a period of deflation in the months to come," he said.

While the focus has understandably been on inflation for a while, a few people, most notably ARK Invest founder Cathie Wood, have been calling deflation a bigger risk. Wood says the Fed overdid it in its tightening cycle.

WMT is down more than 5%.

But the initial reaction from Wall Street bulls is that the company is well-positioned to ride out a downturn in consumer spending and may even be in a position to pick up market share.

Both Jefferies and Citi recommended that investors snap up shares on any weakness. Wells Fargo analyst Edward Kelly said the U.S. EBIT tally was a disappointment. But he sees Walmart as a share gainer in a tough environment that has a good multi-year story.

Walmart’s results contrasted with strong numbers from competitor Target ( TGT ) yesterday, which sent shares soaring, and Macy’s ( M ) today.

Macy’s stock is up 8% after it topped Q3 estimates . It sees FY24 revenue of $22.9 billion to $23.2 billion vs. $23.0 billion consensus and EPS of $2.88 to $3.13 vs. $2.76 consensus.

Among other active stocks

Alibaba's ( BABA ) stock fell after second-quarter revenue missed estimates and the company scrapped plans to spin off its cloud business. The Chinese tech giant said that the recent expansion of U.S. restrictions on the export of advanced computing chips has created uncertainties for the prospects of Cloud Intelligence Group.

Wedbush Securities said it has seen "incrementally positive" checks into Microsoft’s AI initiatives. Analyst Dan Ives, who also boosted his price target to $425 from $400, said the company's Copilot AI is a game changer for the company and likely to aid monetization as the calendar turns to 2024.

Palo Alto Networks ( PANW ) tumbled as it lowered its billings forecast for the fiscal year . For fiscal 2024, the company expects total billings in the range of $10.7 billion to $10.8 billion. That compares to a prior estimate of $10.9 billion to $11 billion.

In today’s trading

Stocks are searching for firm direction, with earnings push and pull and also some mixed economic reports. The major averages are slightly lower.

Weekly initial jobless claims rose more than expected to 231,000. That is welcome news for Fed doves. A tight labor market is probably the chief worry for the Fed at this point.

But October industrial production fell 0.6% on the month, double what economists were expecting.

The 10-year Treasury yield ( US10Y ) fell down to about 4.45% again, but is off its lows.

In the Wall Street Research Corner

How’s this for a couple's nickname? Goldman Swift

Calling Taylor Swift's "Eras" tour one of the most notable cultural events of 2023 , Goldman Sachs' equity team is taking inspiration from her songs for its outlook for 2024.

Strategist David Kostin says: "At this time next year, portfolio managers will look back and realize the best investment strategy for 2024 was to follow Taylor Swift’s advice in the song from her '1989' album: 'All You Had To Do Was Stay' – invested."

Kostin calls for below-trend growth in the S&P 500 to end next year at 4,700, up about 5%, with it staying slightly below its all-time high of 4,797.

"Our interim 3-month (4500) and 6-month (4500) S&P 500 index targets reflect a flat market during 1H 2024. We believe the returns to the index will be concentrated in 2H 2024."

"Resilient economic growth in the beginning of the year will force the market to push back its current pricing that Fed cuts will begin in 2Q, and US election uncertainty will suppress risk appetite. Later in the year, the first Fed cut and resolution of election uncertainty will lift US equity prices," he added.

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