Canadian Tire Corporation Reports Second Quarter 2023 Results
Demand for non-essential items at Canadian Tire stores took a dive in the second quarter as the company said customers are increasingly feeling the pinch of higher inflation and interest rates. Those struggles prompted Canadian Tire Corp. Ltd. to withdraw its sales growth target amid a drop in earnings and revenue.
The current economic environment and level of consumer demand “differ significantly from our expectations when we set out our strategy in early 2022,” said Canadian Tire president and CEO Greg Hicks. “Our second quarter results marked a turning point in the Canadian economy,” Hicks told analysts on a call. “With 10 interest rate hikes in less than 18 months and persistent inflation impacting the cost of living and leading to reduced savings cushions, Canadian consumers are experiencing increased financial strain and facing tougher spending decisions.”
He noted a “performance bifurcation” between purchases of essential and discretionary products at Canadian Tire stores. Sales of essential goods were up more than 6% in the second quarter, while the company’s discretionary goods portfolio was down more than 3%.
Household items considered essential such as light bulbs, paper towels, brooms and other cleaning products are likely still in high demand at Canadian Tire stores, along with basic automotive products like motor oil, said retail analyst Bruce Winder. But he said there’s probably been a pullback for nice-to-have things such as camping and gardening equipment, or sporting goods.
“Their business model is such that, in times of recession, discretionary items are under pressure,” said Winder. “Inflation … is still running around nine per cent for food, so that’s sucking a lot of the dollars out of each household. They don’t have any money to spend on discretionary goods.”
In the three months ended July 1, the Toronto-based retail giant said net income attributable to shareholders fell 32% to $99.4 million from $145.2 million in the same period a year earlier. The 101-year-old company said revenue in its second quarter fell 3% to $4.26 billion from $4.40 billion the previous year.
“The discretionary softness is coming from more indebted households, most notably in Ontario and B.C.,” said Hicks, adding those two provinces have the highest concentration of debt-to-disposable income in Canada. “Changes in monetary policy are softening consumer spend across the country, with the last two interest rate moves specifically creating a more pronounced demand impact in discretionary categories.”
Given the economic climate, Canadian Tire’s target of 4% average annual sales growth by 2025 is no longer appropriate, the company said. That forecast also included diluted earnings per share of at least $26 and retail return on invested capital of more than 15% by 2025. Canadian Tire cautioned investors when it released those targets in March 2022 that risks to its financial aspirations included a “decline in economic growth, consumer confidence, household spending and other market disruptions.”
RBC analyst Irene Nattel called the formal forecast withdrawal a “non-event,” as most analysts had already considered those expectations unachievable. She said net results were “better than feared, highlighting the defensive nature of (Canadian Tire’s) core offering” but that cautious consumer spending would likely keep “tire pressure on the lower side.”
Normalized diluted earnings decreased to $3.08 per share from $3.11 per share, roughly in line with analyst expectations, according to financial markets data firm Refinitiv. The company also noted a fire at a major Brampton, Ont. distribution centre in March cost it $74.6 million, searing its net earnings.
To read the full release, visit the Canadian Tire website.
Home Depot Beats Earnings Estimates, But Sales Slide as Consumers Pull Back on Big-Ticket Buys
Home Depot topped earnings expectations for its second quarter, but posted a 2% year-over-year sales decline as customers remained wary of big purchases and major projects. It marked the first time in three quarters that the company beat Wall Street’s revenue expectations.
Yet the Atlanta-based home improvement retailer reiterated its muted forecast for the fiscal year despite the beat, saying it still expects sales and comparable sales to decline between 2% and 5% compared with the year-ago period. It had lowered the forecast last quarter.
In an interview, CFO Richard McPhail said the company has seen “continued caution on the part of consumers when it comes to larger-ticket, more discretionary spending.” He said in some cases, homeowners already made those bigger purchases during the Covid pandemic. In other instances, they are likely deferring them because of higher interest rates.
McPhail said key pandemic dynamics are reversing, too. Transportation costs have dropped. Vendors aren’t coming to Home Depot with as many requests for price increases. He added that supply chain disruption is “largely behind us.”
Here’s what the retailer reported for its fiscal second quarter compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:
Earnings per share: $4.65 vs. $4.45 expected
Revenue: $42.92 billion vs. $42.23 billion expected
The company reported net income for the three-month period that ended July 30 of $4.66 billion, or $4.65 per share, down from $5.17 billion, or $5.05 per share, a year earlier. Revenue fell year over year from $43.79 billion. Shares of Home Depot closed modestly higher on August 15.
Home Depot faces a more challenging sales backdrop, as demand for do-it-yourself projects and contractors normalizes after nearly three years of unusually high demand. McPhail told investors earlier that 2023 would mark a year of moderation, as customers returned to more typical pre-pandemic patterns. On top of that, the retailer faces a weakening housing market, inflation and consumers’ shift to spending more on services instead of goods.
But McPhail said on August 15 that Home Depot’s typical customers are in good financial shape, thanks in part to sharp home equity gains during Covid. They are still hiring contractors, but for more small projects.
Cooling inflation has also shown up in Home Depot’s sales trends. McPhail said the company has not seen deflation, but is now in a period of “price settling.” Home Depot has lowered retail prices in some cases, he said. The reductions are not concentrated in any particular category.
Home Depot noticed that as the company’s ticket, or typical amount spent by a customer, decreased, its number of shopper transactions began to rise, he said.
Comparable sales in the U.S. and companywide declined by 2% in the fiscal second quarter, but that exceeded expectations for a 3.9% decline, according to FactSet. It marked the third straight quarter of falling comparable U.S. sales.
Total customer transactions fell by about 2% compared with the year-ago period, but the average ticket was roughly flat at $90.07.
On an earnings call, CEO Ted Decker said sales to home professionals were stronger than sales to do-it-yourself customers, but both fell from the year-ago period. He said the backlog of jobs for pros that stacked up during high demand for work during the pandemic has dropped in the last year, but is still higher than historic levels.
Home Depot said in its earnings release that the company’s board of directors approved $15 billion in share buybacks, which will take effect on August 15.
To read the full release, visit the Home Depot website.
Walmart Releases Q2 FY23 Earnings
Walmart CFO John David Rainey offered what might be the best explanation for the giant retailer’s surprisingly strong second quarter.
“This is not your grandfather’s Walmart,” Rainey said, in an interview with Yahoo Finance, minutes after Walmart reported it had boosted revenues by 5.7%, grown e-commerce sales by 24%, improved U.S. comp sales by 6.4% and that it was raising its earnings guidance for the year. Sales of $161.6 billion were up $8.7 billion over the same period last year.
Walmart’s numbers seem even more impressive coming a day after top rival Target reported that it’s comp sales fell by 5.4%, e-commerce sales declined by 10.5% and total revenue was down 4.9% during the quarter.
The new Walmart, CEO Doug McMillon said in a conference call with investors, is a “people-led, tech powered, omnichannel retailer.” The message McMillion and other Walmart execs emphasized on the call, was that Walmart’s embrace of new technology is helping it save money and improve operating margins, make shopping more convenient for consumers, and grab market share from the competition.
But tech can’t take all the credit for the winning quarter. Walmart’s success was the result of nimbly combining old-school strategies the company has relied on for six decades, with new ways of doing business.
Here are advantages that led to Walmart’s second quarter win:
- It protected its brand identity as low-price leader despite inflation pressures – That helped it keep its customer base, and attract new customers as shoppers increasingly were feeling squeezed by higher prices. Walmart executives commented during the call that their share of higher demographic consumers is growing, as even households of $100,000 and more are looking for bargains on food and other staples. Having those higher income shoppers in its stores also gives Walmart the opportunity to sell bigger-ticket and discretionary goods to a valuable demographic.
- It dominates in grocery – As consumers were cutting back on non-essentials and looking for ways to save on groceries, Walmart cashed in on its larger grocery presence.
- Its investments in e-commerce fulfillment and automation are paying off – Walmart execs noted that much of the 24% growth in e-commerce was driven by curbside pickup and store-fulfilled delivery. Fulfilling e-commerce orders from local store inventory is improving Walmart’s digital margins, Rainey said on the earnings call. Walmart is leveraging its stores to fulfill more than 50% of deliveries, Rainey said, and 15% of the stores are served by the company’s new automated distribution centres, which have reduced costs.
- It is scaling its new revenue sources – Walmart Marketplace, which allows third-party sellers to sell on Walmart.com, saw double digit sales growth during the quarter in the home. apparel, and hardlines categories, and the number of customers making Marketplace purchases grew by 14%. In advertising revenue, global advertising was up 35%, and in the United States Walmart Connect was up 35%, with that business nearly doubling over the past two years.
To read the full release, visit the Walmart website.
Lowe’s Releases Q3 FY23 Earnings
Lowe’s reported mixed results for its fiscal second quarter, as consumers tackled springtime projects and helped offset weakening home improvement demand. The company topped Wall Street’s earnings estimates, but fell slightly short of expected sales.
The home improvement retailer stuck by its full-year forecast. It anticipates total sales will range between $87 billion and $89 billion for the period. It projects comparable sales will drop by 2% to 4% this fiscal year. It expects adjusted earnings per share will range between $13.20 and $13.60.
On a call with investors, CEO Marvin Ellison said Lowe’s feels good about the long-term outlook for home improvement because of the older age and low availability housing in the U.S. But, he added, the business will have a tougher time in the short term.
“When you look at consumer sentiment, we noted that we’re seeing a pullback in DIY [do-it-yourself] discretionary spend,” Ellison said. “And that’s really for us the overall theme of how we see the second half of the year.”
Here’s how the company did for the three-month period that ended Aug. 4 compared with what analysts expected, according to consensus estimates from Refinitiv:
- Earnings per share: $4.56 vs. $4.49 expected
- Revenue: $24.96 billion vs. $24.99 billion expected
Lowe’s net income for the three-month period was $2.67 billion, or $4.56 per share, compared with $2.99 billion, or $4.68 per share in the year-ago period. Net sales fell from $27.48 billion in 2022.
Lowe’s sales are slowing this year as unusually high demand fuelled by the Covid pandemic fades. The home improvement retailer earlier this year warned Wall Street of that slowdown, cutting its full-year forecast in May.
Both Lowe’s and Home Depot face a complex backdrop, as consumers deal with rising interest rates and elevated prices of everyday items — yet the companies also benefit from a strong jobs market and a shortage of housing in the U.S. Mortgage rates have hit their highest level in more than two decades, making first-time homebuying unaffordable for some and discouraging current homeowners from moving. Despite higher mortgage rates, home prices rose for the fourth straight month in May, according to the S&P CoreLogic Case-Shiller home price index.
As more Americans stay put, the result should be increased investment in home renovations and projects. But Ellison said shakier consumer confidence is leading to softer discretionary sales.
“What our customers are telling us is that they feel good about their employment situation,” he said on a call with CNBC. “They feel good about the amount of equity in their home and they know that there are projects they’re going to have to get done, but they’re just kind of waiting to see what’s going to happen in the macro environment.”
Comparable sales in the second quarter decreased 1.6% in the fiscal second quarter. That’s still better than the 2.6% decline that analysts expected, according to FactSet. Lowe’s said it got a lift from spring projects, online growth and momentum with home professionals.
Lowe’s has been working to attract more home professionals, which tend to be bigger and more steady spenders. Only about a quarter of Lowe’s sales come from home professionals, while they account for about half of sales at Home Depot.
On the call with investors, Ellison said those professionals tell Lowe’s that they still have a healthy amount of projects in the pipeline. That helps drive purchases of paint, plumbing tools and more.
But after a period of higher costs and out-of-stock items, falling prices are now contributing to lower sales, Ellison said on the call with CNBC. Not only have lumber prices dropped significantly, but appliances have come down in price, too. He said appliance brands have reverted to pre-pandemic levels of promotions. Those discounts, which are funded by the suppliers, are factored into company guidance for the second half of the year, he said.
To read the full release, visit the Lowe’s website.