- Walmart and Home Depot will kick off retail earnings season this week.
- Industry observers expect companies to adopt a more cautious tone amid persistent inflation.
- Healthier profit margins could be a silver lining as some costs come down.
Shoppers walk past a Bloomingdale’s store in the SoHo neighborhood of New York, United States, on Wednesday, December 28, 2022.
Victor J Blue | Bloomberg | Getty Images
After capitalizing on a pandemic-era shopping spree, retailers are preparing for a reality check.
Walmart and Home Depot will kick off the season of retail earnings on Tuesday by releasing holiday quarter results. Other big-name retailers will follow, including big-box players like Target and Best Buy, and malls like Macy’s and Gap.
Corporate reports will come as recession fears cloud the coming year. Americans are now more concerned about inflation than Covid. People choose to spend more on dining out, travel and other services while saving on goods. Higher interest rates threaten the housing market.
A slowdown in sales growth also seems likely after the strong increases of the past three years.
For investors, the end of the retail sugar boom paints a mixed picture. Companies may share modest sales prospects. However, healthier profit margins could be a silver lining as freight costs come down and retailers have less surplus merchandise to sell off. Also, Walmar companies may have more cautious spending plans, like smaller stock orders and slower hiring. That could increase profit margins even if consumers don’t spend as freely.
“The world is focused on sales dynamics,” said David Silverman, retail analyst at Fitch Ratings. “So many market participants are focused on what revenue is, what revenue is, what revenue is.”
But, he added, “it’s operating income that could well rebound after a difficult 2022.”
Silverman said retailers’ strategies have changed compared to a year ago. They then bet sky-high sales will be the new normal and made riskier bets, from placing larger orders to paying extra to expedite shipping. That hurt companies’ margins as unsold goods ended up on clearance shelves and costs rose along with sales.
Retailers have already received a dose of reality. Walmart, Target, and Macy’s are among the companies that have spoken out about a more cautious consumer.
Several retailers have already previewed holiday results. Macy’s warned that holiday quarter sales would be below expectations. Nordstrom said weaker sales and more discounts hurt its November and December results. Lululemon said its profit margins would be lower than expected as the sportswear retailer juggles excess inventory.
Industry-wide holiday results also fell short of expectations, according to the National Retail Federation. Revenue for November and December rose 5.3% year over year to $936.3 billion, below the major retail group’s forecast of between 6% and 8% year-over-year growth. In early November, NRF had forecast spending between $942.6 billion and $960.4 billion.
Retail executives have been looking for clues as they prepare for the upcoming fiscal year. (Most retailers’ fiscal years end in January.)
Macy’s CEO Jeff Gennette told CNBC last month that the department store operator noticed fewer Christmas shoppers were buying items for themselves while they were shopping for gifts. He said these lower purchases “more than made up for the good news we received about gifts and causes.”
The company’s credit card data also showed warning signs, he added: Customer balances on Macy’s, Bloomingdale’s and co-branded American Express credit cards are increasing, and more of those balances will roll over into the next month instead of being paid out.
“If we look at our loan portfolio, you have one client that’s coming under more pressure,” he said.
Some retailers have already taken some difficult steps to prepare for what could be a difficult year. Luxury retailer Neiman Marcus and Saks.com, the e-commerce retailer that grew out of Saks Fifth Avenue stores, both recently had to be fired. Stitch Fix laid off 20% of its corporate workforce. Wayfair laid off 10% of its global workforce. Amazon began laying off over 18,000 employees, including many in its retail division.
Bed Bath & Beyond, which has warned of a possible bankruptcy, recently further reduced its workforce as it also closes about 150 of its eponymous stores.
Target said in November it would cut overall costs by as much as $3 billion over the next three years as it warned of a slower holiday season. Details of this plan were not given. The company will release its fourth quarter results on February 28th.
According to a December survey of 300 retail executives by consulting firm AlixPartners, many retail executives said they also expect cost-cutting measures for their workforce over the next 12 months, such as: B. Hiring temporary workers instead of full-time employees. 37% said they expect pay increases or promotions to slow, and 28% said they expect benefits at their companies to decrease in the coming year.
Of those surveyed, 19% said their companies had had layoffs in the past 12 months and 19% said they expect layoffs in the next 12 months.
Marie Driscoll, a beauty, luxury and fashion analyst for retail consultancy Coresight Research, said she expects companies to take a closer look at other items like free shipping and returns and digital marketing spend.
As interest rates rise, she said, retailers could “find the corporate religion.”
“Retailers look at their stores and say not every sale is worth it,” she said. “The fact that there is a real cost is changing the way companies look at their business.”
Still, some factors are still working in retailers’ favour, she said. The tight labor market could give consumers confidence to spend even if inflation stays hot. People dress up and buy scents when going out again, a factor that may have lifted retail sales in January along with higher spending in bars and restaurants.
She said earnings season will bring surprises and show which companies can navigate choppy waters. Nike, for example, raised its outlook after beating Wall Street expectations in December.
“A lot of that depends on their consumers and the strength of their brand,” said Driscoll. “There is power out there.”