Few retailers have as wide and deep a view into the American consumer as Walmart and Target. Their combined sales in the U.S. totals out to nearly half a trillion dollars. With both physical and online stores, and merchandising that spans everything from clothing to televisions to dumbbells to organic coffee, and much more, Walmart and Target both function to some degree as barometers for the American consumer and the wider retail market. 

Which is why everyone is watching them so closely in this topsy turvy year of 2022. So what can their most recent earnings reports tell us about the health of the consumer and retail economy?

Spending hasn’t collapsed, and may be improving, but consumers are still on the defensive

By now, everyone knows discretionary spending is down as consumers manage rapid rises in food and gasoline prices, which are closely entwined. “We expect inflation to continue to influence the choices that families make and we are adjusting to that reality so we can help them more,” Walmart CEO Doug McMillon told analysts. 

The wider retail market still appears to be struggling on the whole. According to a Cowen analysis, retail foot traffic was up sequentially in the second and third weeks of August but growth remains below 2019 levels by double digits. In a separate note, Cowen analysts said that unit sales in retail “remain weak,” with “real sales” down from last year in sporting goods, department stores, and clothing and accessories. For most of the retailers Cowen covers, the sales to inventory spread has turned negative this year, with trends worsening in Q2 for those that have reported so far.

Walmart and Target have benefited from inflated food sales, but both need food prices to come down

For both Walmart and Target, food sales drove gains in the top-line — much of that due to price increases. Yet that has also pressured profits because of the low margins on food and other consumables.

Walmart CFO John Rainey noted that food sales growth in the U.S. was in the mid-teens — and food inflation at Walmart was up double digits as well. Meanwhile, general merchandise sales — particularly in electronics, apparel and home — lagged. 

Walmart and Target haven’t completely given up on general merchandise

Asked about Q3, Target executives emphasized strong traffic and unit share growth. Despite a “cautionary” consumer environment, Cornell said that “one thing that seems to be very consistent is a guest and consumer who says they want to celebrate the holiday seasons.” That means sales of seasonal items in its general merchandise assortment.

McMillon pegged how the retailer thinks about general merchandise to fuel prices and food inflation. But the Walmart chief also noted that the retailer is being strategic about its buying. He specifically called out Halloween decor categories, inflatables in particular, “that are really fun, cool new items” and noted “we’re going to blow out of some of those.”

Keep your eyes on gas prices

High gas prices have had a layered effect on Walmart and Target. Target CFO Michael Fiddelke said the company expects rising fuel and transportation rates to add “well over” $1 billion to the company’s costs this year.

High gas prices are also squeezing customers, diverting spending away from discretionary purchases. Customers “still have spending power, but they’re increasingly feeling the impact of inflation,” Target chief growth officer Christina Hennington said. “And while the recent reduction in prices at the gas pump have been encouraging, guest confidence in their personal finances continues to wane.”

Finally, fuel is a major input into food prices, as Walmart executives explained. And while price increases on food raise sales levels, it is also stealing from Walmart and Target’s profits as consumers forgo purchases of higher-margin items. McMillon summed it up when the chief said, “The cost of food and fuel, a heavier mix of sales in food and consumables, and excess inventory in general merchandise categories were among the most challenging items for us at the time.”

Supply chain costs and disruption are still elevated but easing

This time last year, retailers just about across the board were racing to secure inventory and paying steeply for ocean or air freight, or, like Walmart, chartering their own ships.

Target COO John Mulligan said that global shipping lead times have started to decline, fuel surcharges are easing and spot rates to move containers have fallen (with Mulligan adding the qualifier “somewhat” to the latter two cost areas). However, Mulligan also said that “conditions remain highly unfavorable” compared to pre-pandemic years, while risks remain in the coming months around energy costs, potential slowdowns at West Coast ports and the possibility of COVID-19 lockdowns in China. 

Walmart’s McMillon said the retailer has reduced the number of shipping containers in its system by more than half since Q1 and “much closer to our historical averages.” That, as Rainey noted, has reduced storage costs from the container backlog. Furner said Walmart has “largely gotten out of the container storage and movement business” as supply chain constraints have eased, though costs around containers remain inflated above past levels. 

Source: Retail Drive