Retailers dread high-flying US consumers falling back to earth

BLOOMBERG

One of the biggest questions for investors over the past year has been when Americans will pull back on spending and trigger a recession. In the fourth quarter, that didn’t happen as retailers and brands exceeded expectations.
But their results and forecasts raised a bunch of red flags for the year ahead.
After the highest inflation in a generation, an increasing group of shoppers — including wealthy ones — are bargain hunting. Savings are dwindling. Consumer debt is piling up. The spending splurge after the height of Covid-19 is over.
As a result, several big retailers tried to pump the brakes during earnings season by issuing sales guidance for this year that disappointed Wall Street. Lowe’s Cos, Best Buy Co and Target Corp all see the potential for revenue to decline this year.
“There is a sense among retailers that the consumer has been defying gravity for quite some time, and they are expecting the music to stop,” Neil Saunders, managing director at GlobalData Plc, said in an email. But “no one really knows when this will happen or the extent to which it will occur.”
Shoppers are already shifting purchases to cheaper options, a trend that often coincides with a recession. Walmart Inc highlighted big gains from families with incomes above $100,000. Dollar Tree Inc, another discounter, touted a similar benefit.
“The current economic climate is driving more higher-income consumers into value retail,” Dollar Tree Chief Executive Officer Richard Dreiling said during an earnings call. They are “trading down.”
The savings rate has dropped below 5% for the first time since 2009, when the economy was in recession following the financial crisis. Meanwhile, inflation remains stubbornly high and wage gains aren’t making up for that.
Rising prices not only make paychecks seem smaller, but they’ve also papered over the fact that a lot of the sales growth in the consumer sector has been from inflation, not shoppers buying more stuff.
Home Depot Inc has been one of the biggest beneficiaries of the pandemic because increased time at home led Americans to spend more on sprucing up their houses. It has boosted revenue by $47 billion, a 43% gain, since Covid-19 hit the US in early 2020.
But in the fourth quarter, which ran through January, the chain’s sales gained just 0.3% — its worst quarterly performance when excluding the initial hit from the pandemic in almost a decade.
Target forecast that comparable sales this year may decline.
In consumer staples, charging more for goods has also been driving sales growth.
In Procter & Gamble Co’s most recent quarter, volume fell 6% — double the rate of the previous three months. But charging 10% more boosted organic sales.