Most of the largest U.S. big-box retailers, including Home Depot (HD.N), Walmart (WMT.N), Target (TGT.N) and Lowe's (LOW.N), are gearing up to release second-quarter earnings in the coming weeks, with Home Depot set to report on Tuesday and Walmart on Wednesday, the same day they will release July retail sales data.

The data will put American shoppers front and center in the big question being debated on Wall Street: Is the economy really headed for a recession? A weak July jobs report sparked the economic meltdown, and retail gains could heat things up again.

Investors won’t be lost if there’s any hint of a slowdown in consumption, especially since consumer spending accounts for more than two-thirds of gross domestic product. Analysts suspect they’ll find enough clues to trip them up.

For example, at least 10 consumer-facing companies that have reported earnings reported lower North American revenue growth than the previous quarter, according to GlobalData’s analysis.

Third-party data, including credit and debit card spending, also show that spending trends this summer have been more volatile. Bank of America economists noted that credit and debit card spending per household fell 0.4% year-on-year in July. It also fell 0.5% in June.

“We are seeing signs that the resilience of the consumer that has underpinned the economy is beginning to wane,” Michael Baker, an analyst at D.A. Davidson, wrote in an Aug. 5 note.

The slowdown was caused by the Federal Reserve raising interest rates to curb inflation. Analysts pointed out that interest rate-sensitive shopping categories such as automobiles, appliances, furniture and home furnishings have seen the most weakness.

Home Depot and Lowe's have already felt the impact of interest rates and have struggled to grow sales for several quarters. Citigroup

Analyst Steven Zaccone said many companies in the hardline space are likely to lower their fiscal 2024 guidance this quarter.

Data calculated by UBS Group AG analyst Michael Lasser showed that earnings estimates for about 37 hard goods and footwear retailers were consistently lowered by about 0.1% after the first-quarter earnings reports were released.

Lowering expectations isn't necessarily a bad thing, Lasser said. The reset of earnings guidance can provide a more achievable baseline for companies' second-half performance.

“We believe this presents a compelling opportunity to enter stocks that have faced near-term pressure and could rebound once expectations are revised downward,” Rather wrote.

Neil Saunders, managing director at GlobalData, said the market may have anticipated a slowdown in consumer spending. The bigger question, he said, is how severe the slowdown is for individual companies.

“There are always winners and losers in retail, but I think the current environment makes it more polarized,” Saunders said. “It makes the winners look better because the losers are growing more slowly, and their sales numbers look very, very shabby, by comparison.”

The winners in the quarter will be those companies that do a good job of controlling costs and improving margins while also delivering solid top-line growth, he said.

Investors will also reward companies that have concrete plans to deal with a slowdown in consumption and those that are prudent in issuing guidance, Saunders added.

Conversely, retailers that are overly ambitious in their outlook may put themselves at a disadvantage.

“Expectation management is all about this market, and it will move stock prices after earnings are released, often in ways you wouldn’t expect,” Saunders said. “It’s not always the companies that report very badly that get hit. Sometimes companies that report good results don’t report as expected.”

Of course, experts say that if comments from industry giants, especially Walmart, turn out to be more pessimistic than expected and indicate a greater risk of recession, then all is lost. Hopefully, that won’t be the case.

The article is forwarded from: Jinshi Data