And the longer inflation remains at elevated levels, the more impact it has, said Neil Saunders, managing director of analytics company GlobalData. “The first couple of months of really heavy price increases, it’s a bit of a strain, but people don’t notice it that much,” he said, but as time goes by, “People start to say, ‘This is becoming a real drag.'”
The data bears that out: Consumer sentiment hit a historic low in June, though the University of Michigan index has edged higher as gas prices retreat from the record highs recorded that month. This is an important measure because people are more likely to spend if they feel economically stable. Consumer spending accounts for about two-thirds of the economy, so any pullback is of interest to economists and policymakers because it could point to a recession. All this while the Federal Reserve is aggressively trying to cool the economy by raising interest rates to tame inflation.
Here are the week’s main takeaways:
Results offer mixed messages
Just weeks after executives from Target and Walmart announced they were slashing quarterly and full-year profit forecasts, the retail giants delivered a few surprises with their second-quarter financial reports.
On Tuesday, Walmart surprised Wall Street with better-than-expected sales and a 8.4 percent jump in profits as new shoppers turned to it for groceries and other essentials. Same-store sales, a key metric, jumped 6.5 percent. The nation’s largest retailer saw its shares pop more than 5 percent that day, then close out the week 4.3 percent higher.
But Target missed analyst expectations, recording a 90 percent drop in profit as it worked to clear excess inventory. The retailer saw a 1.3 percent uptick in same-store sales and a 9 percent jump in comparable digital sales. Traffic also climbed. Shares sank 2.7 percent on the day and ended the week 3.3 percent lower.
Both companies reported strong revenue from their grocery aisles. Though food and beverage sales surpassed all other categories for Target, Walmart saw bigger gains because of an influx of new customers looking to save a few dollars on food and back-to-school merchandise.
“Walmart is also very much in local areas across America,” said Natalie Kotlyar, a retail analyst for BDO. “So they have a larger footprint and in many cases are a destination for consumers.”
Walmart also owns Sam’s Club, which saw record new customers in the second quarter. Its same-store sales — excluding fuel — also increased 9.5 percent.
Shoppers are more selective
Target and Walmart both recorded lower sales in apparel, technology and housewares, which didn’t come as a surprise. It’s widely understood that consumers are cutting out nonessentials to afford necessities at a time when inflation has been hovering near 40-year highs.
This was reflected in the Census Bureau’s retail sales report for July, which showed that sales — including those for gas and cars — were flat.
Large retailers have been dealing with a glut of inventory, partly because of changing consumer habits, partly because of over-ordering and supply chain backlogs. With the holiday season fast approaching, they slashed prices to clear out shelves and make room for new merchandise.
But the markdowns crushed Target’s margins, hurting it far more than its larger rival. Target “really overloaded on inventory,” Saunders said. Other retailers, especially those heavy on apparel and housewares, endured similar pain: Kohl’s, TJ Maxx and Ross all lowered their financial forecasts for the year.
Both companies felt the sting of higher gas and supply chain costs, but Target felt it more, Saunders said, and the increased operation costs combined with steep markdowns left the company with less room to breathe, he added.
“I think Target has spent quite a lot in things like distribution centers, in warehouses, on staff wages,” Saunders said. 'There’s nothing wrong with doing those things, but it’s just really elevated the cost base and that’s really crunched on the bottom-line numbers for Target.”
Walmart is a much larger and leaner company, he continued, and can get better deals from suppliers.
Home improvement bug has cooled
Lowe’s and Home Depot both thrived during the pandemic as home improvement took on more urgency, with more people forced to redefine their space for remote work or school, and others suddenly finding the motivation to spruce up. But that activity has cooled.
Both beat Wall Street’s expectations in the second quarter. But Home Depot had better outcomes thanks to its professional and trade customers, which drive 50 percent of its business, thanks to the hot housing market.
“What Home Depot has lost on the consumer side, it has more than made up for on the pro side,” Saunders said. “There’s still an awful lot of construction projects.”
Because professional sales represents a smaller share of business for Lowe’s — 25 percent — the Mooresville, N.C.- based company is more vulnerable when households pull back on discretionary spending.
Kotlyar noted that the DIY side of both businesses could rebound if interest rates remain high.
“We’re going to see continued … consumer interest in Home Depot and Lowe’s because [consumers are] going to want to fix up their homes if they can’t afford to buy a new one,” she said.