April retail data ease recession concerns but retail earnings say otherwise

April’s U.S. Retail Sales report released yesterday showed U.S. spending growing strongly despite inflation and rising interest rates. But earnings reports from two retailers show a different story.

What’s the big deal? Retail data can help signal whether the economy is headed towards a recession and the data says not today.

• Retail sales grew 0.9% in April, while economists forecasted a 1% increase.
• Retail sales (excluding auto and gas stations) rose 1% — higher than the forecasted 0.7%.

But the data includes inflation and higher prices — which contributed to the rise in April’s retail sales, per Compound Advisors Founder, Charlie Bilello.

Tough luck on the other side of the world. China’s retail sales fell 11.1% in April compared to a year ago — after a near two-month lockdown impacting one of its biggest cities, Shanghai.

The bellwethers: Two retailers — seen as leading indicators for consumer spending — reported earnings yesterday:

• Walmart (NYSE:WMT) fell 11% after reporting a big earnings miss, $1.30 earnings per share vs. $1.48 expected.
• Home Depot (NYSE:HD) rose 1.7% after reporting solid earnings and raising its full-year outlook.

Inflation is having varying impacts on these two companies:

1/ Higher sales, fewer transactions: Home Depot’s total number of transactions fell 8.2% in the quarter — but the amount per transaction rose 11.4%.

2/ Lower profitability: Walmart’s CFO said rising fuel prices, labor costs and inventory levels pressure Walmart’s margins (CNBC). Rising food costs — which have lower margins than other products — also hurt Walmart’s bottom line.

Consumers are shifting to lower quantity packages and Walmart’s cheaper, private brands — signs that consumer wallets are under pressure.