November 18, 2022 | 5 min read
Abby Long is the Senior Managing Editor at PMG.
Heading into Cyber Week, retailers are navigating a holiday shopping season that is markedly different than prior years, as inflation has softened, and retail sales for October rose slightly, yet economic uncertainty looms.
At the same time, retailers are reporting gains, which appear to be driven by deal-seeking consumers and luxury shoppers. Macroeconomic signals and earnings reports from Macy’s, Target, and Walmart, to name a few, offer insight into the current state of the retail landscape, providing the clearest indications of shopper behavior and what advertisers can expect during Black Friday and Cyber Monday, and in the weeks to come.
October retail sales rose 1.3 percent, a higher-than-expected bump but one that was largely driven by early doorbuster holiday deals rather than an increase in consumer spending.
A closer look at retailer earnings reports shows that sales rose during mega-sales events in early October, yet demand subsided after the deals ended, signifying that shoppers remain price sensitive and are on the hunt for the best possible deals of the season.
Looking ahead to the remainder of the holiday season and into 2023, financial forecasts, as shared in recent earnings calls, are clouded by uncertainty and macroeconomic volatility.
The latest batch of government macroeconomic reports reveals that U.S. consumers have remained resilient in the face of record economic volatility. Updated last week, the Consumer Price Index (CPI) for October was up 7.7 percent year-over-year, down from an 8.2 percent increase last month. When food and energy prices were removed, which rose 10.9 and 17.6 percent, respectively, the core CPI was up 6.3 percent, a slight decline from 6.6 percent last month.
While prices still climbed in October, it was at the slowest pace in months, a promising sign that price pressures may be waning just ahead of the holidays. However, “any meaningful relief for household budgets is still somewhere over the horizon,” said Greg McBride, chief financial analyst at Bankrate, in a statement to CNN. “In categories that are necessities—shelter, food, and energy—we continue to see large and consistent increases. The areas posting declines are for the most part either irregular or more discretionary in nature—airfare, used cars, and apparel.”
Earlier this week, the U.S. Department of Commerce reported that October retail sales rose 1.3 percent, slightly higher than expected. Analysts noted that gains in October retail sales were primarily driven by early holiday deals and promotions rather than a demonstrable increase in consumer spending.
In a statement to The New York Times, Mike Graziano, a senior analyst at auditing firm RSM, said that “Holiday promotions were a significant driver of October retail sales. Categories like online spending, furniture, and health and personal care all saw an increase in demand in October compared with September. Spending at clothing and sporting goods stores remained flat or declined, which could mean people are waiting until later in the season to make those purchases.”
Recent earnings reports from big-box retailers indicate that consumers remain price sensitive and are likely window shopping in anticipation of deeper discounts during Black Friday, Cyber Week, and sales later in the season.
Strong luxury sales bolstered Macy’s Q3 earnings, as the department store invests heavily in ecommerce and responds to consumer spending shifts with new inventory. In an interview with CNBC, Macy’s CEO Jeff Gennette noted that window shopping, both in-store and online, has increased in the final weeks of October and early November, with strong foot traffic and site traffic trends but lower-than-expected sales.
TJX, the parent company of TJ Maxx, Marshalls, and HomeGoods, beat quarterly expectations and raised its financial outlook, citing that shoppers are “treasure hunting” for the best deals in stores. Similarly, Ross reported strong demand and also raised its fourth-quarter guidance.
On the earnings call, Ross Stores Chief Executive Barbara Rentler said that “some companies that previously didn’t sell to Ross Stores were knocking on its doors” in an attempt to offload excess inventory, allowing the off-price retailer to offer popular brands at a lower price.
“Recent earnings reports from big-box retailers indicate that consumers remain price sensitive and are likely window shopping in anticipation of deeper discounts during Black Friday, Cyber Week, and sales later in the season.”
Walmart reported “stronger-than-expected sales,” according to The Wall Street Journal, as comparable (online and in-store) U.S. sales rose an impressive 8.2 percent year-over-year, and in-store visits to the big-box retailer increased by 2.1 percent throughout the last quarter. Grocery sales, in addition to a strong back-to-school season, helped boost Walmart's profits for the quarter.
On a call with investors, Walmart Chief Financial Officer John David Rainey highlighted that “about 75 percent of market gains in food came from households that make more than $100,000 a year” as more people seek additional cost-savings.
In contrast, Target saw sales decline throughout the quarter, CNBC reported, as customers felt “the strain of higher prices for groceries, housing, and other necessities” and opted for fewer full-priced goods. Interestingly, Target noted that demand fell after its mega-sales event in early October, signaling that shoppers remain price sensitive and on the lookout for promotions.
Price sensitivity reportedly intensified during the last two weeks of October, according to Target Chief Growth Officer Christina Hennington on the earnings call, a trend that is expected to continue into November. While Walmart and Target are competitors, groceries account for roughly half of Walmart's sales and just 20 percent of Target’s, one of the key differences to explain the companies’ different quarterly performance and outlooks.
Looking ahead, economic uncertainty has clouded financial outlooks, requiring retailers to remain diligent and to have contingency plans in place to maximize the remainder of the year. With retailers like Macy’s, reporting a strong inventory position and promising consumer demand heading into the final weeks of the holiday season and others, like Target, lowering expectations, every retailer will need to be able to adapt to emerging opportunities and shifting behaviors.