Retail bellweathers fail to inspire confidence

As mentioned a number of times before, strong consumer spending is key to a robust US economy. Wal-mart (WMT), the biggest retailer in the world, provides a good gauge of how the US consumer is faring.

Yesterday Wal-mart reported earnings of 72c a share after stripping out one off gains. That compares to 72c a share from the same period last year despite a 9% increase in sales in the current year.

Last Thursday, the company signaled that profit margins were pressured and from the flat bottom line result on rising sales that has become evident.

Deep discounting on back-to-school merchandise in the final weeks of the quarter hurt profit. In early July, Wal-Mart slashed prices on 16,000 items with the aim of stealing a beat on back-to-school sales.

CEO Lee Scott admitted rather candidly that:

"It's no secret that many customers are running out of money by the end of the month." "The paycheck cycle is more pronounced now than it's ever been."

Wal-mart now expects to earn $3.05 to $3.13 a share from continuing operations this year, against a previous estimate of $3.15 to $3.23.



Home Depot (HD) also reported earnings yesterday. The company had been giving away warnings all quarter that their business is under pressure. HD reported a 15% decline in 2Q07 profit.

The company also announced that it remains 'in talks' with prospective buyers of its contractor-supply business. That's funny I could if swore it was a done deal a month ago, how times change.

CEO Frank Blake had this to say about the company's outlook:

"We believe the housing and home-improvement markets will remain soft into 2008,"

Last week Home Depot also shaved the per-share price on a tender offer to buy back 250 million common shares to a range of $37 to $42 each, citing economic conditions. The initial pricing range was set at $39 to $44 a share.

If these results are anything to go by clearly consumers are feeling the pressure. The situation is far from dire but it does little to inspire confidence in a consumer led robust growth picture for 2H07.