Walmart’s Cautious Outlook Reflects Uneven State of US Economy

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Walmart reported some numbers. I thought they were pretty darn good. They're always seemingly pretty good out of Walmart. They know what they're doing over there. Stock's up 2 % here today. Let's break it down with Emily Cohn, consumer team leader for Bloomberg News. Emily, talk to us about the quarter. What's the company saying about their business?

1:39Yeah, I think you nailed it. It was another solid quarter for Walmart in the fourth quarter. They did come out with conservative guidance, which is pretty typical for Walmart. Come out with cautious guidance and then exceed it later in the year, which is sort of their playbook. And then their guidance was also paired with some warning signs or cautious outlook about the economy, which I found interesting. Yeah, I want to pick up on that idea because the CFO talked to Bloomberg and mentioned that tariff driven inflation has reached or is reaching its peak, which I thought was really interesting given that there's so many people expecting rate cuts later on this year, given that inflation seems to have settled down.

2:22What more can they tell us about pricing? I think they told us that prices rose 1 % in the quarter, which I think was the same as the last quarter. But they also mentioned other things like tepid job growth, student loan delinquencies rising, consumer sentiment being uneven. Things that would give any CEO or CFO or company pause when they're trying to outlay what might happen in the coming year. And I noticed over the last couple of years, they've talked about how maybe their customer base is changing a little bit. People, some middle class, maybe even upper income areas coming down to Walmart.

3:03They're seeing more and more of that. Is that still the case? I think, yes, that's definitely the case. And that's sort of their superpower right now that, you know, poor. This is the case shaped economy that we talk about a lot. Poor customers are pulling back in areas. But what they're seeing is wealthier clients, clientele who might not have come to Walmart in the past, shopping at Walmart, especially for things like their groceries, which they've invested in a lot in the last 10 years. You can now find organic groceries in Walmart, and that's really paying off. And they also have this Walmart Plus program, which they're really putting a lot of emphasis on.

3:40It's actually one of the benefits if you're an American Express platinum cardholder, which speaks to that idea that they're really reaching for the higher income consumer. How's that going? And is it making any headway on stealing market share from Amazon with its Prime program? Yeah, they're seeing a huge growth in e-commerce. I think that was one of the major areas that grew this quarter. That is drawing in higher income shoppers who actually pay even more than the membership for faster deliveries, speedier pickup times. And that's helping them also grow market share among wealthier shoppers who are looking for convenience over everything else.

4:20So what are they saying about, did they even talk about on the conference call tariffs anymore? Is that still a discussion point? And what's the company saying about tariffs? Yeah, tariffs came up a little bit, but they said that they expect that tariff-driven inflation to peak now. I think they also benefit here, again, from their groceries. Groceries are a portion of their assortment that is less impacted by tariffs, and they're really benefiting from, I think, 60 % of their sales come from groceries these days. You mentioned e-commerce. It sounds like Walmart will continue to invest in technology and automation.

5:02What were some of the things that they flagged that they're working on in terms of innovation and building on the technology that they have already implemented into their system? Yeah, it was interesting. They said most of their fulfillment in stores is now coming from automated warehouses. Most of their fulfillment for e-commerce is coming from automated warehouses. They have really made huge gains here to speed up fulfillment centers. And I think we should expect to see more of that in the coming quarters. They cited store remodels and automation as the main areas where they're going to be continuing to invest.

5:39You know, one of the things that's amazed me really for 10, 15 years about Walmart is how well their digital business has been, their e-commerce business. they have built that to not only, I mean, they can go toe to toe with Amazon.com on just about anything. It seems like, is that still a growth story for them? Yeah. I think they said something like a third, they've, they've seen a huge amount of, of shoppers are now actually interacting with their AI, their AI assistant on their app and on their website that really helping people make shopping decisions faster. They're seeing an increasing spend from customers who interact with the AI shopping assistant, they said, which I think we can expect to see more.

6:26You know, just in the last five years, their EBITDA has roughly doubled, but their CapEx has tripled. Yeah. So there's that e-commerce build out, that tech build out. Yep. So, I mean, they're putting their money where their mouth is here. You know what Paul's dream job is, Emily? Must he mention this to you? No. Be a greeter at Walmart. See, I'm a nice, friendly guy. He wants the smock. He wants to wear the smock. And, you know, to that point, Walmart employs about 2.1 million people, which makes it a huge employer. Do we have a sense of whether they've been growing their employee base at all with this commitment to technology, to automation?

7:00I think they've definitely made a huge investment in technology. They have a lot more people working on tech than they ever have. And I think we could expect to see more of that for sure. Stay with us. More from Bloomberg Intelligence coming up after this.

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8:50That's the Bloomberg Surveillance Podcast with Tom Keen, Paul Sweeney, and me, Alexis Christophorus. Subscribe today wherever you get your podcasts. Bloomberg Surveillance, essential listening each and every business day. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right, let's move from cars to tractors. We can do that with John Deere. John Deere reported some really solid numbers. The stock's up 12 percent today, so a big move for Deere.

9:30It's up 42 percent year to date. And when you think about the John Deere company, you think about the U.S. farmer, because that's the primary customer there. When a farmer has money, the farmer likes to buy some new tractors. So let's check in with Chris Cialino. He covers all the big equipment companies for Bloomberg Intelligence. Chris, tell us about Deere. What did they tell us in their earnings report? Yeah, it was a really solid beat and raise quarter, And I think this kind of gives us the all clear on the cycle and that, you know, 26 will be the trough earnings year. The one Q beat was was broad base, all segments, better top line, better margins than expected, really on the back of higher shipment volumes with particular strength in the small ag business and construction.

10:15Those are those are markets that, you know, have started to already recover now this year. The large ag business, which is obviously their bigger growth engine, continues to be soft. But I think we're seeing that business stabilize. And really, for the first time in years, we're starting to see some green shoots emerge there. Order books strengthened a little bit during the quarter as well. How does this compare and contrast with what CNH Industrial reported earlier this week, which took a more, it feels like a cautious stance? Yeah, you know, I think so both companies are calling 26 as the bottom.

10:50I think that's pretty well understood at this point. I think the incremental piece coming out of Deere today is that you're starting to see some early signs of improvement in the North American large ag business. That's a market they're projecting in terms of unit volumes to be down 15 to 20 percent this year. That's going to put volumes at the lowest level in more than four decades. But what you're starting to hear from them this quarter is that the order book strengthened, particularly just in the last month of the quarter. You're starting to see a little bit more trade flows go into China. The fleets continue to age.

11:21You have the government aid support. So this is not a big step change, but it's really the first signs of incremental improvement.

11:31You got to have a great sense of timing, Chris. As I said, Deere's up 42 percent year to date. So the market's anticipating this business bottoming and then turning up. How long is this cycle for some of these companies that you follow here that are cyclical? Yeah, so a typical downturn in this business will last anywhere from two to four years. This will be the third year of the downturn. So in terms of the downturn, it looks very similar to what we've seen historically. Typically, the upturns last a little bit longer. But, you know, this is an incredibly volatile market. And it's ultimately dictated by crop prices and farmer profitability.

12:10So the crop outlooks do have a significant impact here in terms of what farmers are willing and able to spend. And it looks like Deere relies on the U.S. for a huge part of its revenue, if not half. What is it doing in terms of growing its business overseas? Does it is it just kind of a trajectory of growth there that is similar to what it sees in the U.S. or is it competing against some established players? Yes, so the regional markets. But in terms of what markets matter for deer, it's it's North America and South America is becoming more important. Reason being those are typically the bigger producers of row crops, corn, soybeans.

12:56There are larger farms. They utilize more the larger equipment that is more conducive to some of the precision technologies, which come in at a higher margin. Europe tends to be a little bit more stable. They get a lot of government support. So think of that market as less cyclical, lower peaks, higher troughs. Those are really kind of the three big growth engines if you think about Deere's geographic exposure. So what is deer saying about the U.S. farmer these days? Listen, things are still challenging. Let's not let's not understate that, you know, crop prices really haven't moved that much and still under tremendous pressure.

13:36As we look at another year of, you know, near record production, they are seeing some signs of stability, I would say. And like I mentioned earlier, I think we're starting to see some early signs of improved order activity again, albeit off a very low base. And a lot of that's predicated on, you know, we're starting to see a little bit more exports going to China. You have continued government support. And then also, you know, there's certainly a need for replacement. The age of the fleet is as old as it's been in a number of years. So as farmers get more money, you start to see some stability on the crop price front.

14:10That should, you know, unlock some pent up demand. Yeah, I'm just looking at the stock price trading at a record high. but it really has gone on a tear over the past three weeks or two weeks. What accounts for that? Was it anticipation of this report or was it something else? A combination of things. You know, I think, you know, it's pretty well understood now that we this year will be the trough of the cycle. So I think there's some positioning ahead of that. And, you know, a lot of these heavy machinery companies typically do well early in the rate cut environment. So the anticipation of lower rates, stronger growth environment, not only in the ag business, but also construction.

14:48I think that sometimes gets overlooked. They're completely refreshing their excavator product lineup. They have a pretty strong position in construction equipment. And I think the growth dynamics there, moving it for 26 and 27, are still quite favorable. Stay with us. More from Bloomberg Intelligence coming up after this. I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you fascinating conversations with the people who shape markets, investing, and business. CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market, whether you own stocks, bonds, real estate, commodities, crypto, you really need to hear these conversations.

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16:11You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Six Flags Great Adventure. My first amusement park, my second amusement park. The first one was Hershey Park. Oh, okay, yeah. That's a good starter amusement park. Yeah, that was a good one. Then you step up to Six Flags Great Adventure. That's some serious park there. Yeah, well, I mean, you have to be ready to kind of be, you know, have trouble standing because of the roller coaster rides being super aggressive.

16:48Yep, absolutely. And they're still there. Cars going in, packing in all the time down there in Jackson, New Jersey. They're all around the country. They reported some earnings here today. Let's get down to it with Jody Lurie. She's a credit analyst. She covers all the leisure companies, including Six Flags Entertainment. Jody, thanks so much for joining us. What did you hear from Six Flags today with their earnings? So I think what's interesting, Paul, is that we're seeing that some of what Sixslag said oddly was similar to what we saw on Avis' call. And both companies had these large impairment charges to boost EBITDA, but it didn't necessarily equate to cash generation.

17:25And both companies are focused on improving their debt load and also just the core of the business, the operational side, adding in AI to boost the business and figuring out ways to turn around. And both companies are dealing with new CEOs. So it's just like a weird sort of compare contrast scenario that I've been toying with in my head all morning. I mean, Paul was talking about how Hershey Park was his first amusement park. And then obviously the big one would be Disney or Universal. Have you been there? No. Okay. That's a pretty good one. Yeah. Is that the competition for Six Flags or does it work on a different level than those?

18:05It is and it isn't the competition, Scarlett. I mean, I think, you know, Six Flags likes to compare itself more to alternatives in leisure and entertainment. There was a great slide that they provided that showcased the value proposition. If you compare it to like concert tickets or, you know, insert sporting event, the amount of time that you spend at Six Flags in theory is all day, right? So the cost to enter and the cost for the, you know, all the sort of concessions is much lower than what you would pay to go to like a Taylor Swift concert. Now, that said, I mean, I think what's so interesting is, is when the company combined, there was this image that they could create like an all pass promotion, right, that you can enter in all parks.

18:50They've only finally started rolling out something that's a regional pass recently. And I'm curious to see what could happen with the company as they improve those sort of points of it. Because what's funny is if you look at it from a revenue perspective, it did actually pretty well this year compared to 24. And 24 was a pretty strong year. Same thing with some of the per cap spending pieces of it, right? The per cap component, the admissions were down, but the in-park spending was decent. And so you say, what's going on? Like, why are they having such issues? And it comes down to an operational issue.

19:23It comes down to the fact that the Legacy Six Flags assets, I think, were in way worse shape than Cedar Fair anticipated when they took on the company. And they're saddled with a lot of debt. So it's really a question of if the capital markets are going to be encouraging enough to help them through. You know, they helped them through in January with a new issue. But really, are they able to sort of support the company through this transition? That park pass you mentioned sounds like, you know, the amusement park version of an epic pass, which makes sense if you're a skier and you go are chasing the weather around the country.

19:54But does it make sense to go to the West Coast for Six Flags and then come back? I don't know. It could, Scarlett. You don't talk to Ira Jersey enough, apparently, at least when it comes to roller coasters. You probably talked to him about interest rates. Next time when you have him on, ask him about his son's American Coasters Enthusiast card that he proudly carries. If you are deep into the roller coaster dynamics and culture, people will go to the end of the Earth. And I am curious to see how the Middle East traction for Six Flags, for SeaWorld, and for some of the other parks that have expanded there, how that's going to play out.

20:29If you do see these park coaster enthusiasts fly out to Saudi Arabia, fly out to the UAE to ride certain coasters. Stay with us. More from Bloomberg Intelligence coming up after this.

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21:49You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Our good friends over in Switzerland, Nestle, a lot of news coming out of them today. They're talking about maybe backing away a little bit from the ice cream business. How can you do that? I don't know. But let's check out what's going on with Nestle with our good friend, Duncan Fox. He's Bloomberg Intelligence Senior Consumer Staples Analyst. He's based over there in London.

22:24Duncan, what's going on with Nestle? It seems like they're considering some strategic moves here. well yes i think it's such a large organization i mean ice cream's quite a small part of their business and it's already in it well i love it too but it's in a joint venture well most of it's in a joint venture with frenary and they took about two billion dollars out last year when frenary did a raising capital so i think it was sort of set that uh the chance would be that they would probably clean up their portfolio a little bit and try and concentrate on really where they have huge market share.

23:01I mean, as much as I love the Nestle ice cream, it is not the global leader Magnum is. And it's well behind. It's sort of half the market share globally that Magnum's got. So it makes sense, I think, to monetize that stake and put it into areas where they are global number one or number two, which is coffee, pet food, and nutrition. So it does make sense. And it makes sense in the context of there's a new CEO, and he's kind of putting his stamp setting out strategic direction for Nestle. Based on what he's done so far, is he still in the assessing stage of, you know, trying to figure out what works, what doesn't work, or is he ready to make actual moves?

23:44It feels like he's ready to make those moves. I mean, he's already sort of sharpened up the focus in sort of making it much more of the four big core asset bases and, you know, three of which are global. So he's merging two sort of nutrition businesses into one. So that should get some cost savings, which should then be invested back into driving organic growth or particularly volume in the case of Nestle, which is something that's been a bit shy the last couple of years. So it really feels that he's sort of focusing very much on getting the volume moving forward on their core categories. And sort of I wouldn't say he's getting rid of everything else, but he's de-emphasizing the importance of some of the smaller parts of the business to make sure they get the large parts right.