Q2 Earnings Preview: Home Depot, Walmart May Show Retail Strength Amid COVID

As the coronavirus pandemic lingers, virus-wary consumers are sticking with their favorite retailers while consolidating their shopping trips. This trend is benefitting some of the largest US retailers which are bucking the general economic downturn.

This week, investors will get a deeper look into their financial performance when some of the biggest US retailers release their second quarter earnings reports.

Home Depot: Store Modernizations, Upgraded Digital Options

Home Depot (NYSE:HD) is scheduled to report Q2 2020 earnings on Tuesday, Aug. 18, before the market opens. Analysts are expecting a projected EPS of $3.6 on sales of $34.08 billion.

HD Weekly TTM

Home improvement companies have outperformed the broader market this year as Americans put additional money into enhancing where they live as they shelter in place. Shares of the Atlanta-based retailer have surged about 30% this year, compared with the gain of just a little over 4% for the broader S&P 500 Index. The stock closed on Friday at $280.55 after hitting a record high earlier in the week.

These positive growth trends were behind an impressive Q1 earnings report in May when sales rose more than expected and customers, on average, spent 11% more at HD stores than they did during the same period a year earlier.

Analysts expect this trend to continue as a growing number of people leave big cities and move into the suburbs, a way of fleeing crowding which exacerbates the COVID-19 crisis.

Just before the deadly pandemic hit, Home Depot was reaping the rewards for its $11-billion spending to modernize the company’s stores, upgrade digital options and enhance offerings for its key trade customers. Sales from Home Depot’s digital platforms grew by about 80% in the first quarter as customers opted for online shopping over in-person browsing during the pandemic.

As well, the strength of the US housing market should also help Home Depot thrive once the COVID-19 outbreak is contained, as lower borrowing costs boost home sales, making it easier for homeowners to increase spending on renovations.

Walmart: Expanding Customer Base

America’s biggest retailer, Walmart (NYSE:WMT) will also report second quarter earnings on Tuesday, Aug. 18, before the open. Consensus anticipates EPS of $1.25 on revenue of $135.29 billion.

At a time when people are mostly staying home and consuming more mundane, daily staples, Walmart’s large brick-and-mortar presence has likely helped the Bentonville, Arkansas-based retailer to further expand its customer base and appeal. Hefty investment in e-commerce, steps toward growing its health care business and some added benefits for its 1.5-million strong workforce are a winning combination that has positioned the mega retailer to supply large swaths to the nation as governments and other businesses grapple with how to respond to the unprecedented health and economic threat.

WMT Weekly TTM

With the expectation the retail giant will report strong quarterly earnings and growing online sales, investors have pushed WMT shares higher by 12% this year. The stock closed up 0.6% on Friday at $132.60.

As the coronavirus pandemic forces more consumers to pivot to online shopping, media reports indicate the retailer might soon launch a membership service called Walmart+, which would to compete with Amazon's (NASDAQ:AMZN) Prime. The lingering public health crisis offers a window of opportunity for Walmart to entice, and potentially lock-in, the swelling number of online shoppers through a membership program with speedy delivery and other perks.

According to Bloomberg, citing a survey from Credit Suisse analysts and researcher Numerator, five million customers could join Walmart+ off the bat. The potential audience for the service could be as large as 20 million, the report says. Amazon’s Prime program, by contrast, has more than 118 million members in the US, according to Consumer Intelligence Research Partners.

Bottom Line

While both retailers are forecast to show improvements in their sales, their bottom-line profitability might get squeezed by the costs associated with higher worker pay and benefits, along with protecting customers during the coronavirus pandemic. That said, comparable sales and each vendor's online expansion will be the two critical numbers investors should focus on.