Economists have been looking for cracks in American consumer spending for years now amid persistent inflation and higher interest rates, but until recently, Americans have been defying the odds. Despite consistent forecasts of a recession and gloomy consumer sentiment due to rising costs of living, Americans are still trying to keep spending at record levels until recently. But in April, retail sales growth stop completely. And now, major retailers’ earnings reports have revealed some clear warning signs about the health of American consumers.
First, to be clear, Walmart won the day. The retail giant topped Wall Street’s earnings and revenue forecasts for the first quarter, reporting adjusted earnings per share of $0.60, compared with $0.52 expected and revenue was 161.5 billion USD, exceeding the forecast of 159.5 billion USD. E-commerce offerings and spending from high-net-worth customers helped lift results. However, the company also saw an important spending pattern that often occurs when consumers feel financially stressed: a shift from spending on wants to needs.
As Walmart Chief Financial Officer John D. Rainey explained during an earnings call with analysts on May 16: “Many consumer wallets are still stretched and we see the impact of that in our business mix as they spend more payroll on non-essential categories and less on general merchandise.”
Walmart said it has increased the number of discounts or “takebacks” it offers on key items to boost sales, in part because, as Rainey repeated on the call, “wallets have been stretched” . When asked why he refused to raise Walmart’s forward earnings forecast Morgan Stanley Analyst Simeon Gutman Rainey also gave a clear answer, emphasizing his uncertainty about consumer spending.
“I think we all agree that we are very far from a certain environment around the consumer. “Consumer health is something we read about every day, and as we get into the first quarter of the year, we just want to be patient,” the CFO said.
It’s not just Walmart that raised concerns about consumer health in its first-quarter earnings report. Target saw its net revenue fall 3.1% from a year ago to $24.5 billion in the first few months of 2024 and missed earnings estimates, with earnings declining on per share at $2.03, compared to a forecast of $2.05. According to Target, inflation-weary shoppers turned to essentials during the quarter, leading to a decline in sales and earnings.
In a follow-up call with reporters, President and CEO Brian Cornell said that Target shoppers’ “biggest challenge” is “food and household essentials inflation,” Yahoo Finance reported. Cornell even added that there has been “a strain on consumers’ wallets” echoing comments made by Walmart Chief Financial Officer John Rainey.
Target saw comparable brick-and-mortar sales fall 4.8% in the first quarter as shoppers sought cheaper options and comparable online sales only slight increase. In a move to stem the further decline in sales, the company Reveal a plan to reduce prices on nearly 5,000 everyday items like groceries and diapers.
But during Target’s earnings call with analysts Wednesday, chief growth officer Christina Hennington noted that she is paying close attention to consumers’ ongoing financial stress to determine the path forward. exactly for the company, signaling that price cuts may not be enough to spur growth.
“Sustained high prices have had a significant impact on many families’ budgets and savings,” Hennington said. “Currently, one in three Americans have maxed out or are nearing the limit on at least one of their credit cards. For these reasons and more, we remain cautious on our near-term growth prospects.”
