What retail earnings have revealed about the consumer

Thu, Nov 16, 2023, 1:34 PM

Retailers such as Walmart (WMT), Target (TGT), and Home Depot (HD) are starting to raise concerns about consumer spending. In an interview with Yahoo Finance, Walmart CFO John David Rainey said consumers are starting to focus on needs, not wants. Yahoo Finance Executive Editor Brian Sozzi breaks down what he is hearing from retail executives and why there could be a recession among lower-income consumers.

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Video Transcript

- Let me get your take. I mean as you've kind of spoken with these retailers CEOs, you've been there talking to the c-suite as you look through their earnings report. What are some of your big takeaways?

BRIAN SOZZI: Walmart did not lay an egg. And I understand why the market is selling off this stock. Walmart shares 52 week high coming into the report. A lot of expectations built into this. And yes, there was some operating margin pressure year over year because of higher wages. But when you drill into this quarter from Walmart, checked a lot of boxes at least for the bulls who probably sent that stock higher into this report.

Inventory in the US down 5%. 4.9% comparable sales increase in the US business in the quarter. Oh yeah, what did target do? Their comparable sales were down 4.9% in the most recent quarter. So Walmart continuing to take market share in the business, not only from Target, but from grocery stores. Another big quarter for groceries at Walmart immediately has me thinking, well, that quarter from Kroger a lot of other grocery stores probably not good.

- There were a couple other things that stood out to me, not just from Walmart but from other retailers as well. For Walmart specifically, I thought it was really interesting to hear the word choiceful again--

BRIAN SOZZI: I like that word.

- --from Walmart. Do you like that word?

- Is it one word? Is it a dash?

- It's select-- it's just selective. It's another way of saying selective. And John David Rainey, the CFO, is talking about shoppers waiting for events. Waiting to almost be forced into buying things. He pointed out, for example, Walmart has 25 toys priced at under $25 to try to lure in customers.

Which makes me think, if Walmart is so focused on discounting, what are we going to see from some of the other retailers as well, especially those who are catering to a perhaps mid to lower income consumer?

BRIAN SOZZI: Now right on, Julia. And really three things make a trend for me. So we heard Walmart say people are buying closer to need. That's the same exact thing that we heard or I heard from Target CFO on their earnings call as well, saying consumers are waiting to the last minute to buy a pair of jeans, waiting to the last minute until it snows or it gets cold to buy a jacket.

Going out a couple of weeks ago, that's also what we heard from Levi's CFO on Yahoo Finance too, talking about a slower than expected start to the quarter. Now if there's any savings grace here, retailers are fundamentally in a different position this year versus last year. So while they might be feeling the impact of student loan payments kicking back in October 1, you saw sales start to soften for these retailers since then, a lot of them in are better inventory position. Last year at this time, they were sitting in an inventory glut. This year inventory down pretty much across the board even at a company like Macy's.

- Do you think Brian, after though you read through these earnings reports, you listened to the commentary, that we are perhaps seeing signs of this kind of lower income consumer recession. Because it's been flagged by some analysts, they're looking at-- they're looking at savings. They're looking at credit quality deterioration. They're looking at confidence. It's been a theme some are flagging.

BRIAN SOZZI: I had never heard of this theme really until two weeks ago. And I think it was Allianz Bernstein that came out with a really good note, talking about we're in a low income consumer recession. Can you make a case for it? Absolutely. You have that low income consumer still battling high levels of inflation in everyday essential items.

So I know the market cheered a CPI report yesterday and things might happen. We might see disinflation. The average consumer going to Walmart or Target are just not feeling it yet. They're still seeing product prices for groceries household staples up 15% to 20%, in some cases 30%. Brian Cornell CEO and chairman of target noted on the earnings call yesterday, baby formula up 40%.

So the average household is still dealing with a lot of problems. And oh, yeah, here's a $500, now they have to send out for student loan payments. Lot going on. What does it mean? Less discretionary purchases now.

- At the same time, I think we have to separate out what the effect of that is going to be. Because even at a Walmart or Target, if they can preserve their margins, even if the sales are down as in the case of a Target for example, they're still going to be OK.

And Bank of America has said that if you back out and look at the bigger economic picture, that higher income consumers are much more important for the bigger consumer spending picture.

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What retail earnings have revealed about the consumer

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