Morning Note: Market news and updates from Walmart and Deere.

Market News

US Treasury yields surged after resilient economic data (retail sales and new jobless claims) prompted traders to lower their expectations for aggressive interest rate cuts this year. The odds of a cut have reduced, with a 24.5% probability of 50bps cut in September versus 55% a week ago. The 10-year Treasury is trading at 3.90%, while gold is $2,454 an ounce.

US equities continued their recent rally last night – S&P 500 (+1.6%); Nasdaq (+2.3%) – spurred on by gains in tech stocks as investors flocked back to risk assets.

In Asia this morning, markets followed the US lead with strong gains: Nikkei 225 (+3.6%); Hang Seng (+1.7%); Shanghai Composite (+0.1%). The yen fell 1.3% versus the dollar, and was trading around the 149 level, easing fears of a massive carry trade unwind. 

The FTSE 100 is currently trading 0.3% lower at 8,324. UK retail sales ex-fuel rose by 0.7% in July, slightly better than the market forecast of 0.6%. Sterling trades at $1.2877 and €1.1725.

Brent Crude trades at $80.20 a barrel. The Biden administration bought 1.5m barrels of US sour crude from Exxon and Shell to refill strategic reserves.

Metal traders are adopting ‘rent sharing’ deals to stockpile metals in Singapore to boost revenue and minimize costs. Combined zinc and lead inventories in LME warehouses registered on the island have grown almost 1,000% since May 2023 to a record in recent weeks.

Source: Bloomberg

Company News

Yesterday lunchtime, Walmart released results for the second quarter of its financial year to end January 2025. The company delivered another strong performance and raised its full-year guidance. In response, the shares rose by 6%.

Walmart operates more than 10,500 stores and numerous e-ecommerce websites under 46 banners in 19 countries. In the face of strong competition, the group’s strategy is ‘to lead on price, invest to differentiate on access, be competitive on assortment, and deliver a great experience’. The company’s sales are massive – $648bn in the last financial year.

In the 13 weeks to 31 July, consolidated revenue increased by 5.0% on a constant currency basis to $169.3bn, better than the guidance provided by the company of 3.5%-4.5% and the $168.5bn market estimate.

In the US, comparable sales increased by 4.2% (ex-fuel) to $115.3bn. Growth was made up of a 3.6% increase in transactions (i.e., volume) and 0.6% rise in average ticket (i.e., price). E-Commerce sales grew 22%, led by store-fulfilled pickup & delivery and marketplace. The group’s value-convenience proposition is resonating with consumers and members, while share gains were primarily driven by upper-income households. Sam’s Club, the trade business, generated revenue of $20.0bn, up 5.2% in comparable terms (ex-fuel).

Outside of the US, the international business grew by 8.3% at constant currency to $29.9bn. Global eCommerce sales rose by 21%, led by store-fulfilled pickup & delivery and marketplace. The global advertising business grew by 26%, led by Walmart Connect in the US (+30%).

Gross margin rose by 43 basis points to 24.4%, driven by Walmart US and Walmart International. The group kept a tight rein on costs – adjusted operating expenses as a percentage of net sales grew by only 41 basis points to 20.6%, driven by higher variable pay expenses due to exceeding planned performance. Adjusted EPS rose by 9.8% to $0.67, versus the group’s guidance of $0.62-$0.65.

There was free cash generation of $5.9bn, while net debt ended the quarter at $38.2bn. Global inventory was down by 2.0% to $55.6bn, including a decrease of 2.6% for Walmart US. The company highlights that in-stock levels are ‘healthy’.

Excess cash is returned to shareholders through dividends and buybacks. During the quarter, the group bought back $1.0bn of its shares, leaving $14.5bn of its $20bn repurchase authorisation.  The company also paid out $1.7bn in dividends.

The company has raised its full-year guidance. It now expects consolidated net sales growth of 3.75%-4.75% at constant currency vs. previous guidance to be ‘at the high end or slightly above’ the 3.0%-4.0% range. Operating income growth of 6.5%-8.0%, versus 4.0%-6.0% previously. Adjusted EPS is expected to be $2.35-$2.43 above the previous guidance of $2.23-$2.37. In the current quarter, the group expects net sales to increase by 3.25%-4.25%, with EPS of $0.51-$0.52.

Source: Bloomberg

Yesterday lunchtime, Deere & Company released results for the three months to 28 July, the third quarter of its financial year to end-October 2024. Although the numbers were better than market expectations, activity in the group’s end markets remains subdued. However, guidance for the full year was reiterated and, in response, the shares were up 6% in US trading hours.

Deere is a global agricultural and construction equipment company with annual sales of more than $61bn. The group has a strong track record of innovation, a comprehensive distribution infrastructure, and global after-market capability. The group’s strategic aim is to outpace industry growth and generate a mid-cycle operating margin of 15%.

The business is benefitting from broad trends based on population and income growth, especially in developing nations, which are driving agricultural output and infrastructure investment. In addition, technological advances and agricultural mechanisation are expanding existing markets and opening new ones by helping customers increase their productivity, profitability, and sustainability.

The company believes it has incremental addressable market opportunities of more than $150bn that can be targeted through engaging with more customers and increasing levels of connectivity. The focus is on helping customers manage higher costs and increasingly scarce inputs, while improving their yields, using Deere’s integrated technologies.

However, in the near term, conditions in the global agricultural and construction sectors have been challenging because of higher interest rates, squeezed farming incomes, and lower government support. As a result, fleet replenishment has moderated.

During the latest quarter, worldwide net sales and revenue fell by 17% to $13.15bn, while net sales of equipment were down by 20% to $11.4bn, versus the market expectation of $10.9bn as higher prices helped the company as volume fell. Net income fell by 42% to $1,734m, while EPS fell 38% to $6.29, albeit better than the market forecast of $5.69.

The Production & Precision Agriculture segment includes large and certain mid-size tractors, combines, cotton pickers, sugarcane harvesters and loaders, and soil preparation, seeding, application and crop care equipment. During the quarter, sales fell by 25% to $5.1bn due to lower shipment volumes partially offset by price realisation. Operating profit declined by 35% to $1,162m, mainly due to lower volumes and employee-separation programmes’ expenses. The margin slipped from 26.2% to 2.28%.

The Small Agriculture and Turf segment includes certain mid-size and small tractors, as well as hay and forage equipment, riding and commercial lawn equipment, golf course equipment, and utility vehicles. During the latest quarter, sales fell by 18% to $3,053m, with lower shipment volumes partly offset by higher pricing. Operating profit was down 32% to $496m, with the margin falling from 19.6% to 16.2%. Construction & Forestry sales fell by 13% to $3.2bn, while operating profit fell 37% to $448m.

The group’s Financial Services division reported adjusted net income down 29% to $153m, due to higher provision for credit losses and less-favourable financing spreads, partially offset by income earned on higher average portfolio balances and favourable discrete tax items.

Deere’s balance sheet is robust, with net debt of c. $57.7bn, a level consistent with supporting a credit rating that provides access to low cost and readily available funding. The group has a policy to raise its dividend “consistently and moderately”, targeting a 25%-35% payout ratio of mid-cycle earnings. The latest quarterly dividend was raised by 18% to $1.47 per share. 

Looking forward, in response to weak market conditions, the company has taken steps to reduce costs and strategically align production with customer demands. Against that backdrop, net earnings are still forecast to be around $7.0bn, with operating cash flow of $6.0bn-$6.5bn. By division, net sales are still expected to decline by 20%-25% in Production & Precision Agriculture, 20%-25% in Small Agriculture and Turf, and 10%-15% in Construction & Forestry.

Source: Bloomberg