By Bill Peters
Earnings Watch: Walmart, Target and other retailers report but Wall Street is not optimistic
After three years of economic upheaval that led to rising prices and consumer discontent, consumer spending could be worse.
When the nation’s largest retail chains report this week — Walmart Inc., Target Corp. and Macy’s Inc. (M) are among them — executives could help analyze more of what has been called the “bad vibes” economy as the holidays approach. , Wall Street remains skeptical and signals from the retail sector remain mixed.
“Our macroeconomic view is one of caution towards the low-end consumer and within the wholesale, department store and retail channel in the US through Spring/Summer 24,” said John Kernan , analyst at TD Cowen, in a note last month.
Low-income consumers have been hit harder by rising commodity prices. And these overall higher prices have made customers more selective about spending on the things they want rather than the things they need. Rising energy prices and borrowing costs, as well as tighter credit terms and the return of student loan payments, also posed a threat to demand.
UBS analysts said in a research note Thursday that in so-called softline retail – that is, things like clothing – retailers continue to lower prices in an effort to eliminate items which buyers did not want.
“The situation is getting worse,” reads the title of this note.
“Our view is that the market is underestimating the pressure on industry sales from the diminishing ability and willingness of U.S. consumers to spend on clothing and footwear,” the analysts continued.
“We expect sales trends to weaken during 4Q23 (link),” they said. “Additionally, new October data reinforces our belief that companies will experience greater gross margin pressure than Street forecasts, as it shows that discounts have increased (year-over-year) and that inventory levels have reached a new high.”
Home improvement retailer Home Depot Inc. (HD) reports earnings Tuesday, as a limited supply of available homes, higher prices and mortgage rates continue to raise questions about homebuyer demand. Target (TGT) reported Wednesday that higher-priced essentials leave its consumers with less wiggle room to spend outside of the grocery section. Walmart (WMT), which reports Thursday and sells more groceries, fared better with investors, and the company said it attracted both high- and low-income shoppers looking for cheaper options.
However, consumer traffic analytics firm Placer.ai found that foot traffic declined in the third quarter for those three retailers, as well as for BJ’s Wholesale Club Holdings Inc. (BJ), which reported Friday.
“One takeaway from this data is that the screws appear to be tightening on U.S. consumers, as visits to most of the retailers mentioned are down year over year,” the company said in an email.
Still, the National Retail Federation, an industry group, said it expected record spending during the holiday season, which it defined as Nov. 1 to Dec. 31. The group said it expected sales to rise between 3% and 4% to reach a record level. range of $957.3 billion to $966.6 billion.
This year’s holiday season will follow 2021’s supply chain safeguards that drove up shipping costs, and a wave of discounts last year as those safeguards, coupled with a shift in Demand for basic goods after the war in Ukraine initially drove up food prices, forcing many shoppers to prioritize basic necessities. But Jack Kleinhenz, the NRF’s chief economist, said that despite the pressures on shoppers, some government data showed consumers had made more savings in the pandemic era than once thought.
“While there is great uncertainty in measuring the performance of the economy, it continues to move forward and defy predictions of recession, proving that it is more resilient than expected,” Kleinhenz said in a press release Wednesday.
“I expect the recent pace of spending to continue through the holiday season and consumers to continue spending on a range of items and experiences, but at a slower pace,” he said. he continued.
Adobe expects U.S. shoppers to spend a record $221.8 billion online this holiday season, thanks to holiday discounts. Vivek Pandya, principal analyst at Adobe Digital Insights, said that even though customers are on firmer footing than last year, they could sacrifice faster and more expensive shipping options, piling on more of their purchases in big discount days and turn to immediate purchase. -subsequent services to get what they need for the vacation.
Other retailers, like TJX Cos. (TJX) – owner of TJ Maxx and Marshalls stores – Bath & Body Works Inc. (BBWI), Gap Inc. (GPS) and discount clothing chain Ross Stores Inc. (ROST) also reported during the week. In August, Ross Stores, which attracts many low- and middle-income shoppers, cited “easing inflationary pressures.”
Yet TJX recently announced it would close a handful of stores, according to reports. And Target, in September, announced the closure of nine locations, citing theft, an issue that has become a bigger topic on earnings calls this year, amid reports of daring heists and sometimes violent. But it has prompted new questions about the extent to which the data supports executives’ complaints.
This week in gains
Separately, Advance Auto Parts Inc. (AAP) reports earnings, after S&P Global Ratings in September downgraded the auto parts retailer’s credit rating to “junk” and said it believed the company had given up to market share due to strategic missteps. Warner Music Group Corp. (WMG) and Applied Materials Inc. (AMAT) also report.
Twelve S&P 500 companies, including three members of the Dow 30, report this week, according to FactSet.
The call to put on your calendar
Tyson Foods and Food Prices: Food prices have remained high over the past year, and Tyson Foods Inc., the major poultry and beef producer, could offer more color on these trends when it will release its quarterly results on Monday. The company, after raising prices last year, reported lower prices for pork and chicken in August. But consumers are still struggling to keep up, and the company is closing some factories in an effort to cut costs. In September, media also reported that Tyson (TSN) and Perdue Farms were under investigation by the Department of Labor after a New York Times Magazine article about migrant children working in their factories. Representatives for both companies said they would cooperate with investigators, according to the New York Times.
Figures to watch
Cisco and Palo Alto sales: Networking giant Cisco Systems Inc. reports results Wednesday. The results will come after its $28 billion deal to buy cybersecurity company Splunk Inc. (SPLK), as cyberattacks become more serious and Cisco (CSCO) attempts to expand its software and security products. security, manage potentially prudent IT budgeting and take action. towards AI like all other technological players. Simon Leopold, an analyst at Raymond James, recently said he expected strong results from Cisco, but expressed concerns about future growth.
Wedbush analyst Daniel Ives said in September that Cisco’s acquisition of Splunk was “a boost to Palo Alto, Checkpoint, Crowdstrike, Microsoft, Zscaler and others, which the tech stalwart does not is not remaining idle in this market and is now playing an aggressive role in gaining market share in the years to come. » When Palo Alto Networks (PANW) reports on Wednesday, executives could offer more details on the dynamics of this competition.
-Bill Peters
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11-12-23 1557ET
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