Economists have been looking for flaws in U.S. consumer spending for years amid persistent inflation and higher interest rates, but until recently Americans have defied the odds. Despite consistent recession forecasts and dismal consumer confidence numbers brought on by the soaring cost of living, Americans have managed to continue to spend at record levels until recently. But in April, growth in retail sales stopped completely. And now, earnings reports from major retailers have revealed stark warning signs about the health of the American consumer.
First, to be clear, Walmart won the day. The retail giant beat Wall Street’s first-quarter earnings and revenue forecasts, reporting adjusted earnings per share of $0.60, compared to expectations of $0.52, and revenue of $161. .5 billion dollars, exceeding the forecasted $159.5 billion. E-commerce offerings and spending by higher-income customers helped support results. But the company also witnessed a key spending pattern that typically occurs when consumers feel financial distress: a shift in spending from wants to needs.
As Walmart CFO John D. Rainey explained during an earnings call with analysts on May 16: “Many consumer wallets are still overextended, and we’re seeing the effect on our mix activities, as they spend more of their salary on non-discretionary categories and less on general merchandise.
Walmart said it has increased the number of price reductions, or “rebates,” it offers on key items to boost sales, in part because, as Rainey reiterated on the call, ” wallets have been put to the test.” When asked why he refused to raise Walmart’s earnings forecast by Morgan Stanley According to analyst Simeon Gutman, Rainey also gave a telling answer, highlighting his uncertainty about consumer spending.
“I think we all agree that we are far from a certain environment around the consumer. Consumer health is a topic we talk about every day, and given that we are in 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 sales fall 3.1% from last year to $24.5 billion in the first months of 2024, and missed profit estimates, with diluted earnings per share coming in at 2.03 dollars, against 2.05 dollars expected. Inflation-weary shoppers turned to essentials during the quarter, according to Target, leading to lower sales and profits.
In a follow-up call with reporters, Chairman and CEO Brian Cornell said Target shoppers’ “biggest challenges” were “inflation in groceries and household necessities,” Yahoo Finance. reported. Cornell even added that there was “pressure on the consumer’s wallet,” echoing comments from Walmart CFO John Rainey.
Target saw a 4.8% comparable sales decline at its brick-and-mortar stores in the first quarter as shoppers sought cheaper options, and a slight increase in comparable online sales. In order to avoid a further decline in sales, the company revealed a plan to reduce prices on nearly 5,000 everyday items like groceries and diapers.
But during Target’s earnings conference call with analysts Wednesday, Chief Growth Officer Christina Hennington noted that she is paying close attention to consumers’ ongoing financial struggles to determine the right path forward for the company. company, signaling that price cuts may not be enough to revive growth.
“The sustained level of high prices has had a significant impact on the budgets and savings of many families,” Hennington said. “Currently, one in three Americans has reached or is approaching the limit on at least one of their credit cards. For these and other reasons, we remain cautious in our short-term growth outlook.
