Economists have been looking for cracks in U.S. consumer spending for years now amid persistent inflation and rising interest rates, but until recently, Americans have been defying the odds at every turn. Despite persistent recession forecasts and dismal consumer sentiment numbers due to rising costs of living, Americans have managed to continue spending at record levels until recently. But in April, retail sales growth stopped completely. Now, major retailers' earnings reports have revealed some stark warning signs about the health of the American consumer.
First, to be clear, Walmart won the day. The retail giant topped Wall Street's first-quarter earnings and revenue expectations, reporting adjusted earnings per share of $0.60, compared to $0.52 expected, and revenue of $161.5 billion, topping the $159.5 billion expected. E-commerce offers and spending from high-net-worth customers helped boost results. But the company also saw a key spending pattern that typically occurs when consumers feel financial pressure: a shift from spending on wants to needs.
As Walmart's CFO, John D. Rainey, on an earnings call with analysts on May 16: “Many consumers' wallets remain stretched, and we're seeing the impact of that in our business mix as they spend more of their paychecks on non-discretionary categories and less on general merchandise.
Walmart said it has increased the number of price cuts, or “rollbacks,” it offers on key items to boost sales, in part because, as Rennie reiterated on the call, “wallets have been depleted.” When asked why he declined to raise Walmart's future earnings guidance by Morgan Stanley analyst Simeon Gutman, Rainey also gave a pointed response, emphasizing his uncertainty about consumer spending.
“I think we all agree that we're far from a certain consumer environment. Consumer health is something we read about every day, and given we're only a quarter into the year, we just want to be patient,” the CFO said.
Walmart wasn't alone in raising concerns about consumer health in its first-quarter earnings report. Target saw its net sales decline 3.1% from a year ago to $24.5 billion in the first few months of 2024, and beat earnings estimates, with diluted earnings per share coming in at $2.03, compared to $2.05 expected. Shoppers tired of inflation turned toward essentials during the quarter, according to Target, dragging down sales and profits.
In a follow-up call with reporters, Chairman and CEO Brian Cornell said the “biggest challenges” Target shoppers face are “inflation in food and household essentials,” Yahoo Finance reported. mentioned. Cornell even added that there was “strain on the consumer's wallet” in an echo of Walmart CFO John Rainey's comments.
Target saw comparable store sales decline 4.8% at its brick-and-mortar stores in the first quarter as shoppers looked for cheaper options, and only a slight rise in comparable sales online. In a move to prevent further decline in sales, the company unveiled a plan to reduce prices on nearly 5,000 everyday items such as groceries and diapers.
But on Target's earnings call with analysts on Wednesday, chief growth officer Christina Hennington indicated that she was paying close attention to consumers' ongoing financial pressures to determine the right path for the company, suggesting that price cuts may not be enough to reignite growth.
“The continuing level of high prices has had a tangible impact on the budgets and savings of many families,” Henington said. “Currently, one in three Americans have maxed out or are close to maxing out at least one of their credit cards. For these reasons and more, we remain cautious about our near-term growth outlook.