Economists have been looking for cracks in U.S. consumer spending for years amid persistent inflation and higher interest rates, but until recently Americans have defied the odds. Despite persistent recession forecasts and gloomy consumer sentiment numbers caused by the rising cost of living, Americans managed to do so continue to spend until recently at record levels. But in April, retail sales rose stopped completelyAnd now earnings reports from major retailers have revealed some stark warning signs for the health of the American consumer.
To be clear: Walmart won the day. The retail giant beat Wall Street’s earnings and revenue forecasts in the first quarter, reporting adjusted earnings per share of $0.60 versus the $0.52 expected, and revenue of $161.5 billion, beating the $159.5 billion forecast. E-commerce offerings and spending by high-income customers contributed to positive results. But the company also observed a key spending pattern that typically occurs when consumers feel financial stress: a shift from spending on wants to spending on needs.
Walmart CFO John D. Rainey said in a conference call with analysts on May 16: “Many consumers’ wallets are still stretched, and we are seeing the impact of that on our business mix as they spend a larger portion of their pay on non-discretionary assets Categories spend less on general merchandise.”
Walmart said it has increased the number of discounts or “rollbacks” it offers on key items to boost sales, in part because, as Rainey reiterated in the call, “wallets were tight.” When asked why he declined to raise Walmart’s profit forecast by Morgan Stanley Rainey analyst Simeon Gutman also gave a meaningful answer, emphasizing his uncertainty about consumer spending.
“I think we can all agree that we are far from a particular environment around the consumer. Consumer health is something we read about every day and given that we are one quarter into the year, we just want to be patient,” the CFO said.
Walmart wasn’t alone in raising concerns about consumer health in its first-quarter earnings report. Goal Net sales fell 3.1% year-on-year to $24.5 billion in the first months of 2024, missing profit estimates. Diluted earnings per share were $2.03, compared to forecast $2.05. According to Target, inflation-stricken shoppers turned to essentials during the quarter, leading to the decline in sales and profits.
In a subsequent call with reporters, Chairman and CEO Brian Cornell said the “biggest challenges” for Target shoppers are “inflation in food and household goods,” Yahoo Finance reportedCornell even added that there had been a “strain on consumers’ wallets,” a reference to comments made by Walmart CFO John Rainey.
Target reported a 4.8% decline in comparable store sales at its physical stores in the first quarter as shoppers sought cheaper options, and saw only a slight increase in online comparable sales. In order to prevent further declines in sales, the company presented a plan to reduce the prices of nearly 5,000 everyday items such as food and diapers.
But on Target’s conference call with analysts on Wednesday, Chief Growth Officer Christina Hennington indicated that she is closely monitoring consumers’ ongoing financial strain to determine the right path for the company, and suggested that price cuts may not be enough to stimulate growth again.
“The continued high price increases have had a significant impact on budgets and savings for many families,” 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 and other reasons, we remain cautious about our near-term growth prospects.”