May 27, 2023

Retailers’ commentary becoming downbeat – FreightWaves


Some of the biggest retailers in the U.S. announced unusually weak first-quarter results, with signs of increasingly cash-strapped consumers abundant. 

Among the themes discussed on Q1 calls were the shift from discretionary items to lower-margin essential ones (food and beverage), elevated “shrink” (theft) and a resumption of price competition following unusually substantial price increases during the pandemic.

FreightWaves reporters have written in recent months about the weakness in U.S. box demand, an indication of the poor state of the goods economy. Americans are struggling even amid ongoing student loan forbearance that’s about to end, which will bring about yet more financial strain.

Home improvement giants announce unusual sales guidance reductions

Home Depot and Lowe’s, the two largest home improvement retailers, both cut their full-year sales guidance after just one quarter of the year. For perspective, excluding Q1 2020 (when the pandemic broke out), Home Depot hadn’t cut its full-year sales guidance in Q1 dating back at least to 2006. Lowe’s last did so in 2011 based on our research.

Home Depot reported store comparable sales in the U.S. declined by 4.6% in the first quarter of 2023 compared to the same period last year, while comparable sales at Lowe’s declined by 4.3%.

Discretionary spending under major pressure

Both Walmart and Target reported a slowdown in sales trends in March and April compared to January and February. Walmart pointed to SNAP benefit reductions and lower tax refunds. An uptick in Social Security benefits and Supplemental Security Income (SSI) payments as a result of the annual cost-of-living adjustment offset some of those pressures.

Walmart experienced pronounced weakness in its general merchandise sales, which exclude food and beverage. On its May 18 earnings call, Walmart CEO Doug McMillon said continued inflation in grocery items and other necessities is forcing consumers to spend less on discretionary goods — a trend that’s expected to continue through 2023.

“The persistently high rates of inflation in these categories lasting for such a long period of time are weighing on some of the families we serve,” McMillon said. “This stubborn inflation in dry grocery and consumables is one of the key factors creating uncertainty for us in the back half of the year because of the cumulative impact on discretionary spending and other categories, specifically general merchandise.”

Despite these challenges, Walmart raised its sales forecast for 2023. 

Target CEO Brian Cornell also noted that more expensive essentials have forced consumers to cut back.

“[Consumers are] investing more in those household essentials and food and beverage items, and they’re shopping more cautiously when it comes to all things discretionary,” Cornell said in a call with reporters, according to a Yahoo Finance article.

Dollar Tree reported an uptick in same-store sales in Q1 2023, but the discount retailer nonetheless cut its full-year earnings guidance, owing to the impact of elevated shrink (most commonly theft) and the shift from discretionary items to daily essentials. 

“I think the consumer is feeling the real pressure now of a lot of things that have taken place,” Rick Dreiling, Dollar Tree chairman and CEO, said. “We’ve had change in SNAP benefits, tax returns are smaller than this time last year, all the stimulus is out of the system, and all of that is taking root, and the consumer now is more focused on needs and buying to those needs as close as they can versus wants.”

Foot Locker slashed its sales outlook for 2023, pointing to “the tough economic backdrop, causing us to reduce our guidance for the year as we take more aggressive markdowns to both drive demand and manage inventory.”

BJ’s Wholesale Club President and CEO Bob Eddy talked about customers’ reluctance to buy almost anything “big ticket,” like televisions or patio furniture, noting that “it’s a very picky consumer out there at this point from a high-ticket perspective.”

Best Buy topped consensus earnings estimates in its fiscal Q1, though its sales fell short of consensus and the company noted recessionary behavior. 

“I think what we would say is we’ve been seeing a consumer who is, whether or not you call it a recession, exhibiting some recessionary behaviors depending on the different category that you’re talking about. So it’s absolutely unusual,” CEO Corey Barry said on Best Buy’s earnings call. 

The company noted a heightened level of promotional activity in certain categories, in some cases “even more promotional than they were pre-pandemic.” Best Buy highlighted appliances, computers and headphones as among the categories under the most pressure along those lines, discretionary ones all.

Costco reported its fiscal Q3 results Thursday, missing consensus on both sales and earnings. Its U.S. comparable sales excluding changes in gasoline prices and foreign exchange were up 1.8% in the 12 weeks ended May 7, well below the 6% growth rate in the first six months of its fiscal year. 

As did a host of other retailers this earnings season, Costco noted the strength in nondiscretionary/essential items and weakness in big-ticket discretionary ones. The company is seeing greater promotional activity as is Best Buy and noted on its conference call that it has seen consumers trading down from beef to chicken and even to products such as canned chicken, canned tuna, etc.

And RH (formerly Restoration Hardware) said Thursday it will have to take deeper markdowns than it previously expected because of deteriorating demand.

More consumer pain ahead

While retailers pointed to the impact from SNAP benefit reductions and lower tax refunds as among the reasons for the spending weakness, there are other major potential problems ahead.

The end of the student loan forbearance, banking crisis and potential ramifications of the debt ceiling negotiations (in terms of spending caps or cuts) could put further strain on Americans’ budgets, which are already under substantial pressure judging by these retailers’ comments.

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