Consumer spending pushes retail sales higher in July, retailer earnings expected to rally

Consumers opened up their wallets in July and spent more than they have for most months of this year with retail sales up 0.6%, according to a U.S. Department of Commerce report on Tuesday (Aug. 15).

Retail sales were significantly better than the year-ago period when sales fell 0.24% in July. Economists say the healthy July numbers were a positive for the economy given weaker showings in June and May, and could boost earnings for Wal-Mart Stores and other retailers reporting quarterly earnings this week.

Consumer spending accounts for roughly 70% of the U.S. economy and is a metric closely watched by economists, though consumers are sometimes hard to read.

“The inherent volatility in the monthly retail sales reports notwithstanding, consumers will remain the key driver of growth in the U.S. economy,” said Richard Moody, chief economist of Regions Financial.

Retail sales have climbed 4.2% in the past 12 months, close to the five-year average. July sales were boosted by a 1.2% increase in auto dealer sales, and a 1.3% jump in online sales. Home and garden centers also added 1.2% to sales and the beleaguered department store sector improved sales by 1%. Excluding auto and gasoline, retail sales still rose a healthy 0.5% in July.

Also a positive sign for retailers was Home Depot which reported record earnings on Tuesday (Aug. 15) and boosted its outlook for the rest of the year. The home improvement retailer rang up $28.11 billion in revenue for the quarter ending July 31. Top line revenue surpassed Wall Street expectations of $27.84 billion and improved 6.19% from a year ago. Same-store sales in the U.S. rose 6.6% as more Americans invested in their homes. Home Depot earned $2.67 billion, or $2.25 per share, in the period, compared to $2.44 billion, or $1.97 per share, a year ago.

Home Depot said it expects 2017 earnings to increase 13% from last year with sales climbing around 5.3%.

Target reports earnings on Wednesday and Wal-Mart Stores reports ahead of the opening bell on Thursday. Last month Target raised its earnings guidance citing improved in-store traffic and positive same-store sales based on June. Target expects improved earnings of $1.15 per share. Wall Street has taken a cautious view of Target with 17 of the 25 analysts following the company neutral on the stock. Target shares (NASDAQ: TGY) are down more than 33% this year, despite the better outlook provided in July.

Wall Street expects Wal-Mart to earn $1.07 per share when it reports on Thursday, with revenue expected to rise 1.7% to $120.76 billion for the period ending July 28. The retail giant expects positive same-store sales and improved in-store traffic on top of another strong month for e-commerce growth.

Analysts seem to favor Wal-Mart as an investment with nearly half of the 32 analysts ranking the stock overweight or expected to outperform the market. Since January Wal-Mart shares (NYSE: WMT) are up 17%.