Compilation of Target, Walmart, Lowe’s and Home Depot stores.
Reuters
How well is the US consumer holding up against skyrocketing inflation? It depends who you ask.
Four major retailers — Walmart, Target, Home Depot and Lowe’s — reported quarterly financial results this week, and each offered a different perspective on where and how people spend their money.
Walmart said some of its more price-sensitive customers are beginning to shy away from private label brands, while Home Depot emphasized the resilience of its customer base, a significant percentage of which are professional homebuilders and contractors.
The reports came after Amazon flashed warning signals for retail in late April, when it posted the slowest revenue growth for any quarter since the dotcom crisis in 2001 and offered a bleak forecast.
Still, expectations on Wall Street were higher this week for both Walmart and Target. Analysts and investors hadn’t expected the two big-box retailers to make such huge profits over the period as supply chain costs weighed on sales and unwanted inventory, such as TVs and kitchen appliances, piled up. Walmart closed 11.4% lower on Tuesday, marking the worst day since October 1987. On Wednesday, Walmart fell another 7%, while Target had its worst day in 35 years.
However, Home Depot and Lowe’s have seen increased strength from shoppers in recent weeks.
“Our customers are resilient. We’re not seeing the sensitivity to that level of inflation that we initially expected,” Home Depot CEO Ted Decker said during the company’s earnings call on Tuesday. (Shares of both home improvement chains closed about 5% lower Wednesday amid broader market sell-off.)
The mixed commentary from these retailers is largely due to the fact that Americans perceive economic volatility differently depending on their income level. Businesses and consumers are in an unprecedented transition period after months of Covid-related lockdown measures that have seen purchases of canned goods, toilet paper and Peloton Bikes skyrocket. Multiple rounds of stimulus dollars fueled spending on new sneakers and electronics.
But as that money dries up, retailers must find their way into their new normal. That includes inflation at its 40-year high, the Russian war in Ukraine and a still-crippled global supply chain.
“While we’ve experienced high levels of inflation in our international markets over the years, it’s unusual for U.S. inflation to be this high and move so quickly, in both food and general goods,” Walmart chief executive Doug McMillon said on Tuesday of a for-profit. . conference call.
This week’s results may foreshadow trouble for a number of retailers, including Macy’s, Kohl’s, Nordstrom and Gap, which have not yet reported results for the first quarter of 2022. Those businesses that rely on consumers to enter their stores to buy new clothes or shoes could face particular pressure, as Walmart hinted that shoppers have begun to pull back on discretionary items to spend more money on groceries.
At the same time, retailers are citing an increase in demand for items such as luggage, dresses and makeup as more and more Americans plan vacations and attend weddings. But the concern is that consumers will be forced to compromise somewhere in order to afford these things. Or they look for discounted items at stores like TJ Maxx.
Here’s what Walmart, Target, Home Depot and Lowe’s tell us about the state of the American consumer.
walmart
Walmart sees a mixed picture, shaped by consumers’ household income and how they feel about the future. But in its most recent quarter, the nation’s largest retailer said shoppers are showing they are budget-conscious.
Customers walked out of the stores and left the retailer’s website with fewer items purchased. More of them skipped new clothes and other general merchandise as they saw the prices of gasoline and groceries soar. Some traded for cheaper brands or smaller items, including a pint of milk and the store-brand lunch meat instead of a more expensive brand name, Chief Financial Officer Brett Biggs told CNBC.
On the other hand, he said, some customers have been looking for new patio furniture or eagerly chasing the flashy new game console, he said.
“If you look at the demographics of the US and put our customer card on it, we’d be very close to the same thing,” Biggs said. “And so you have some people who are going to feel more pressure than others and I think that’s what we’re seeing.”
Goal
Target said it sees a resilient consumer who has new priorities as the pandemic becomes more of an afterthought.
“They’re switching from buying TVs to buying luggage,” Chief Executive Officer Brian Cornell said in an interview on CNBC’s “Squawk Box.” He later added, “They’re still shopping, but they’ve started spending their dollars differently.”
That change was evident with fiscal first quarter purchases, he said. Customers bought decor and gifts for Easter and Mother’s Day. They hosted and attended larger children’s birthday parties – leading to a jump in toy sales. They also bought fewer items, such as bicycles and small kitchen appliances, as they booked flights and scheduled trips.
Cornell pointed to the high spending levels Target faced in the first quarter of a year ago as Americans got money from stimulus and had fewer places to spend it.
Comparable store sales were still growing despite that challenging comparison, he noted. Additionally, Target’s in-store and website traffic grew nearly 4% year over year. However, the sales growth figures include the effects of inflation, making everything from freight costs to groceries more expensive.
Target also had a higher level of price cuts last quarter, a staple of retail sales that more or less disappeared during the pandemic as shoppers had a strong appetite and retailers had fewer goods on their shelves.
DIY store
The hardware store retailer informed investors on Tuesday that it did not yet see any differences in consumer behavior.
Home Depot’s average ticket was up 11.4% in the quarter, driven largely by inflation. But executives also said consumers are trading, not trading. For example, according to Home Depot’s Vice President of Merchandising Jeff Kinnaird, consumers are switching from gas-powered lawnmowers to more expensive battery-powered options.
This behavior is likely due to the fact that the vast majority of Home Depot’s customers are homeowners, who have seen their home values rise over the past two years. CFO Richard McPhail said on the call that more than 90% of his DIY customers own their homes, when in fact all sales to contractors are on behalf of a homeowner.
McPhail also said that about 93% of his mortgage customers have fixed rates. As interest rates and home prices rise, consumers considering moving are choosing to stay in and renovate their current home instead.
lowe’s
Lowe’s echoed similar sentiments during his conference call on Wednesday. CEO Marvin Ellison said rising house prices, aging housing stock and ongoing housing shortages are the main economic drivers of Lowe’s business.
“It’s one of the reasons I think home improvement is a unique retail industry and can have this macro environment where there are a lot of questions about consumer health,” he told analysts.
Consumers working on DIY projects account for about three-quarters of Lowe’s sales, which is a larger share than rival Home Depot. So far, the company has not seen any material trade-in from those consumers.
However, consumers are starting to feel the pressure of rising energy prices. Ellison told CNBC that Lowe’s customers are switching to battery-powered landscape tools and lawn mowers and more energy-efficient washing machines.
“Do I think it has something to do with fuel prices? The answer is absolutely,” he said.
Lowe’s fell short of Wall Street’s expectations for its quarterly sales, but executives attribute the retailer’s disappointing performance to the weather.
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