Retail Earnings Show Shoppers Are Adjusting Spending Habits
Gas prices are tumbling, interest rates are up, and unemployment is down, yet consumer sentiment, as measured by the University of Michigan, is hovering at record lows. While the economy cools off from last year’s significant growth and buzzworthy headlines point to a potential recession, in general, consumers are still spending. Across the latest pull of macroeconomic data, consumer research, and retail earnings, consumers and brands are walking an economic tightrope. As retailers wrestle with excess inventory and higher supply chain costs, consumers are pulling back spending in some key categories, as near-term inflation remains top of mind for shoppers and business executives across the country.
The U.S. Commerce Department recently reported retail sales were flat in July compared to the previous month, marking a slowdown from June’s figures, which saw retail sales rise by a revised 0.8 percent. For the first time in months, July retail sales showed gains in actual goods sold, demonstrating that demand isn’t dwindling. Morning Consult research suggests that while retail has continued to see spending growth, gains were led more by inflation than by increasing consumer demand. Robert Frick, a corporate economist with Navy Federal Credit Union, contextualized these numbers in a statement to Retail Dive, saying, “Spending patterns have changed to more staples as gas and food prices have risen, but Americans generally continue to eat out, travel and spend to maintain their standards of living.”
Last week’s retail earnings reports only substantiated the trends underpinning these figures. Big box retailers like Walmart, Target, and Kohl’s noted that consumers are shifting budgets to cover the costs of basic goods, including food and home essentials. Walmart CEO Doug McMillon acknowledged on a call with analysts that inflation had contributed to an increase in sales for the company, with average ticket size up 5.5 percent for the quarter. Transactions grew by one percent as well. Rising prices across household essentials and other categories also drove more middle- and high-income families to the superstore to take advantage of Walmart’s more affordable pricing. McMillon said that customer foot traffic to stores improved in July over the previous month. Lower gas prices and back-to-school shopping likely contributed to these shifts as well, especially as more schools return to in-person learning this fall. In an interview with CNBC, Walmart CFO John David Rainey said that “roughly 75 percent of Walmart’s grocery share gains [last quarter] came from shoppers with household incomes of $100,000 or more” as shoppers gravitated toward retailers that offered more value.
As costs spike and ecommerce usage plateaus, DTC brands Allbirds, Warby Parker, and Glossier recently suffered layoffs and slashed forecasts amid depressed quarterly earnings. Mattress brand Purple CEO Rob DeMartini cited “the continued shift in demand away from home-related categories and the impact of inflation in consumer discretionary spending” for delaying top-line recovery for the brand as DTC revenue fell 30 percent last quarter. Interestingly, Warby Parker announced it would open 40 more brick-and-mortar stores by the end of the year while foot traffic rises across shopping malls and retail stores.
Luxury retailers such as Dior, Louis Vuitton, and Versace reported strong sales last quarter and raised financial outlooks. Similarly, Ralph Lauren and Capri Holdings, the parent company for Michael Kors and Jimmy Choo, reported quarterly revenue gains of 8 percent and 8.5 percent, respectively. Luxury brands have bucked the inventory troubles and spending shifts affecting other brands, with Ralph Lauren CEO Patrice Louvet stating that while the brand isn’t immune to broader macro headwinds tripping up other retailers, it’s been successful at attracting younger shoppers, who are willing to pay full price for goods.
Morning Consult remarked on the bifurcation between spending habits across income levels, reporting that while “U.S. adults earning $100,000 or more seem to be taking inflation in stride when it comes to purchasing decisions, those in households earning below $100,000 a year are increasingly pulling back, with sticker shock and trading down taking a toll on spending growth.”
As more people pay closer attention to how they spend, Placer.ai reports that “the current economic challenges also appear to be boosting certain categories of discretionary spending.” For example, “foot traffic to movie theaters suffered an initial hit in April, but visits have since skyrocketed, with July 2022 visits up 72 percent compared to a March 2022 baseline.” The beauty and spa industry is seeing a similar trend, with foot traffic increasing every month this year. Despite challenges, consumers are still looking to treat themselves and spend money on non-essential goods and services.
Research shows shoppers are actively seeking deals, promotions, and other ways to save big and minimize expenses. Insider Intelligence reported that “deals and promotions will be the most important factor for shoppers deciding where to spend” this holiday season. “Consumers are enthusiastic about celebrating the holidays after two years of limited or pared-back gatherings,” though early research shows that “many shoppers plan to cut back, switch to value brands, and shop even earlier in the season to avoid price hikes.”
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The impact of inflation on brands varies across categories, but universally, executives were cautious on earnings calls this week as macroeconomic signals paint a fuzzy picture of the current state of the American economy. “Brands that remain agile and prepared to forecast, build and activate contingency plans that address core business needs will be best positioned to navigate our current economic climate,” said Tim Lardner, Client Strategy Partner at PMG. “With the holiday season on the horizon, it’s more important than ever to monitor customer signals with a bias for action and ensure brands continue to demonstrate value for their customers.”
Posted by Abby Long
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