Walmart and Target earnings and outlook: Key trends for retailers

Aim and walmart both cater to more thrifty shoppers, but the two big retailers have seen very different results when it comes to earning your dollars.

Target missed Wall Street’s sales expectations for the fiscal second quarter. Walmart beat Wall Street revenue estimates for the three-month period. Target cut its forecast for the year, while Walmart raised its outlook.

The divergent performances of the companies illustrate some of the fundamental differences of retailers.

Walmart, the nation’s largest grocery store, makes more than half of its annual revenue from grocery sales, a category shoppers shop for even when times are tough. Target makes only about 20% of its annual revenue from groceries, making it more reliant on sales of items like clothing, earrings and cushions that customers can skip when they’re feeling frugal.

Target, which tends to attract a wealthier customer than Walmart, may also be seeing a more dramatic shift in spending as consumers spend on Taylor Swift tickets and vacations in Europe. Those shoppers might also be trying to balance splurging on services with shopping at places perceived to be cheaper, like Walmart or TJX Enterprises-Owned by TJ Maxx, Marshalls and Home Goods, which posted year-over-year sales and profit growth earlier this week.

However, the contrasting results from Target and Walmart also capture how some retailers are succeeding more than others by serving fickle customers. consumers and weather economic headwinds.

Wall Street added to the confusion with its own counterintuitive moves. After the earnings reports, he bought Target shares on Wednesday and sold Walmart shares on Thursday. The potentially surprising moves could reflect the companies’ recent stock performance, with Walmart shares up about 10% this year compared to Target’s shares falling about 13% over the same period.

Despite the differences, the companies demonstrated that they still have a lot in common. Target and Walmart leaders offered similar descriptions of American consumers who now think twice before spending money on non-essential items while paying more for food.

“As we look at the consumer landscape today, we recognize that the consumer is still challenged by the levels of inflation they are seeing on food and beverages and household essentials,” Target CEO Brian Cornell said on a call. with journalists. “So that’s taking up a much bigger chunk of your budget.”

Walmart CFO John David Rainey echoed similar sentiments, describing consumers as “choice or picky” on a call with CNBC.

However, both executives added that shoppers can be persuaded to spend, with a good deal or when preparing to celebrate holidays or seasonal events.

Here’s a closer look at the three key ways Target and Walmart’s most recent quarterly results diverged:

As shoppers head out into the world again, some retailers have seen double-digit declines in online spending.

Target followed that pattern in the second quarter. Its digital sales fell 10.5% year-over-year.

Walmart bucked the trend. Ecommerce sales increased 24% for Walmart US in the second quarter.

Both retailers pointed to curbside pickup as a major driver of online sales, a key differentiator from the competition. Amazon.

Walmart posted gains from online sales for store pickup and delivery, as well as more advertising revenue. It also credited its third-party marketplace, which is Walmart’s version of Amazon’s online business model. The online marketplace is made up of vendors who list items on Walmart’s website, helping to expand merchandise assortment and generate a higher profit margin than selling items directly online.

Customers are also visiting Walmart’s website and app more frequently, Rainey said. The number of weekly active digital users grew more than 20%, she said on the company’s earnings call. The number of customers shopping for items at Walmart’s marketplace increased 14% in the second quarter, with double-digit growth in housewares, clothing and staples, a category that includes sporting equipment and appliances.

Target has lagged behind in online sales. But it is making moves to try to change the trends.

The retailer will implement a revamp of its digital experience over the next three months, Target’s chief growth officer Christina Hennington said on an earnings call Wednesday. She said the website “will include different landing experiences, more personalized content, improved search functionality, ease of navigation, and other updates to bring more joy and convenience to our digital guests.”

Walmart, for its part, updated the look of its website and app in the spring.

Target will offer another advantage to attract more business online. Starting this summer, it will add Starbucks beverages for curbside pickup at most stores.

For more than a year, Americans have generally been reluctant to search for new outfits, gadgets, or other items they can live without.

That has made life more difficult for retailers, who rely on high-priced, impulse purchases to drive sales. Merchandise tends to bring in higher profits than the sale of staples like milk, bread, and paper towels.

Rainey, Walmart’s chief financial officer, pointed to signs that may be changing. He said there was a “modest improvement” in discretionary goods in the second quarter, even though general merchandise sales still fell in the low double digits year-over-year. He said sales of blenders, hand mixers and other kitchen gadgets have skyrocketed as some consumers cook more at home.

Target didn’t see the same relief. Sales of frequency categories such as food and beauty items were not enough to offset weaker discretionary sales at the retailer.

Target’s Hennington said trends in discretionary categories “remain weak overall.” He pointed to a few exceptions, including the popularity of a Taylor Swift vinyl and colorful Stanley tumblers designed with Chip and Joanna Gaines.

Both retailers, however, said they are stocking up on essential items and placing more modest orders for discretionary items. Target, for example, said at the end of the second quarter that its overall inventory levels fell year-over-year, but it intentionally reduced discretionary inventory further.

Retailers have a lot to worry about as food prices stay high, interest rates rise and student loan payments come back.

But Walmart and Target had contrasting tones when discussing the coming months.

Target CEO Cornell said sales trends improved in July, but not enough to stop the company from cutting its outlook for the year. When asked about back-to-school shopping, Cornell and CFO Michael Fiddelke emphasized that it was very early in the season.

Walmart struck a more confident note. On the earnings call, CEO Doug McMillon said overall merchandise sales beat the company’s expectations. He said the popularity of GLP-1 drugs, drugs like Ozempic used for diabetes and weight loss, could also boost foot traffic and revenue in the future.

And, he added, “the trends we see in general merchandise sales make us feel more optimistic about those categories in the second half of the year.”

McMillon said back-to-school is off to a better start than the company predicted. He said that spending tends to correlate with consumer spending later in the year, which could be a positive sign for the critical holiday season.

“Usually when back to school is strong it bodes well with what happens with Halloween and Christmas and GM [general merchandise] in the back half,” he said.

Target shared similar hopes that customers will open their wallets and reverse the retailer’s sales slump as pumpkin spice and gift-giving season approaches. He saw an improvement in traffic and sales trends in July, which he attributed in part to spending on the 4th of July holiday.

“We know our guests want to celebrate culturally and seasonally relevant moments and will lean heavily on those moments in the third quarter and the upcoming holiday season,” Hennington said.