Weekly Brief: Retailers Aren’t Decking The Halls Just Yet

Weekly Brief: Retailers Aren’t Decking The Halls Just Yet

over 1 year ago3 mins

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There may be jolly times coming for US retailers as inflation begins to play nice, but some could find themselves stuck on Santa’s naughty list.

🕰 Recap

  • Walmart warned its profit would come in lower than expected back in May
  • But that was before fresh data from earlier this month showed that US inflation was lower than expected in October
  • Walmart then announced a stronger-than-expected earnings update on Tuesday
  • But rival Target’s quarterly results were much weaker than expected when it reported on Wednesday

✍️ Connecting The Dots

So far, so bad for US retailers this year. Shoppers have been keeping their wallets firmly shut as high inflation and rising interest rates make it more expensive to spend, and that’s left retailers with a sky-high pile of unsold stock. That’s not the end of it, either: plenty of those retailers made sure to stock up on extra goods earlier this year in a bid to swerve supply chain hold-ups, so that disappearing demand is all the more painful.

Walmart – the US’s biggest retailer by revenue – was hit hard by shrinking demand back in May, and even warned investors that it wouldn’t earn as much annual profit as a result. But inflation’s slight let-up in October coincided with a turn in Walmart’s fortunes. And although a single swallow doesn’t make a summer, there’s something to suggest Walmart’s momentum might actually last: everyday grocery products make up over half of the company’s sales, and cash-strapped shoppers need those essentials no matter what. Walmart, then, saw its inflation-boosted quarterly earnings come in higher than expected, but the same can’t be said for rival retail giant Target. Rather than essential groceries, Target mainly sells nice-to-haves like clothes and electronics – and they’re some of the first things customers cut when times get tough.

Now, the upcoming holiday season could either make or break this year for retailers, and inflation will dictate which retailers will reap the rewards. If inflation stays too high for comfort, essentials-sellers like Walmart will be set for a jolly season. But if inflation ticks lower, shoppers might treat themselves to some holiday cheer at more discretionary retailers like Target. Mind you, some have it all covered: with its ecommerce and general merchandise segments alive and kicking, Walmart would benefit from any potential uptick in discretionary spending too.

🥡 Takeaways

1. It’s still all about logistics.

Supply chain hurdles were on the top of investors’ minds this time last year, as China’s sturdy lockdowns kept retailers from stocking their shelves. And while logistics concerns are still front and center this year, they’re closer to, ahem, home. Customers are doing their holiday shopping later than they did last year, according to data from investment bank Cowen. And while stores’ high stockpiles mean there’s no need to hurry, consumers’ delay will probably lead to warehouse bottlenecks and late deliveries. That would leave retailers needing to cover extra costs they mightn’t have prepared for, and that would knock their profits.

2. There may be another group of retail winners, no matter what inflation does.

The haute-couture end of the retail market won’t have been as badly beaten up by stiff inflation and rising interest rates: after all, an extra 10% on a price tag probably won’t matter for buyers of a $300,000 Birkin bag. And with China – the world’s most important market for luxury goods demand – potentially perking up again on the back of upcoming economic support measures, the likes of LVMH, Gucci-parent Kering, and Swiss watchmaker Richemont could benefit.

🎯 Also On Our Radar

Tech sector layoffs have made for some eye-grabbing headlines lately: Meta’s cut 11,000 jobs, Amazon 10,000, and Twitter nearly 4,000. And while those numbers are only a drop in the ocean that is the entire US economy, they could signal a major slowdown in high-growth ad spending and cloud computing markets – and that dip could impact many more industries than just Big Tech.

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