cCheerful, shrewdSober.” That’s how Wal-Mart President Doug McMillon described consumers on the US retail giant’s quarterly earnings call on Feb. 21. That may be the case. What they’re not, in aggregate at least, is caution, frugality, or frugality. Consumer spending increased last year even as real disposable income fell by more than 6%.The splurge continued in January as America navigated its way through a warm winter, buoyed by 517,000 new jobs and an inflation-related spike in Social Security payments.Retail sales rose last month down 3% on a monthly basis, and consumer confidence reached its highest level in more than a year Those looking for evidence of a “soft landing,” as the economy avoids recession despite tightening monetary policy, found solace in the American consumer.
On the surface, Wal-Mart’s fourth-quarter results look like Exhibit A for optimists. The company’s comparable sales in America grew 8.3% faster than expected, compared to the prior year. If you look closely, you’ll find that earnings is riddled with warning signs. One of the main reasons for Wal-Mart’s market share gains in groceries was cash-strapped consumers, including high-income families, who traded in from fancier supermarkets. Its higher-margin discretionary offering, which includes toys, clothing, and household items, has been less successful. That was despite a massive reduction in merchandise in order to clear stockpiles built up as a result of a post-pandemic miscalculation about shoppers’ appetites for things like garden furniture. Most worryingly, Wal-Mart forecast sales growth of 2.5-3% for the current fiscal year, below analyst expectations.
Other retailers tell a similar story, in a more interesting form. Home Depot, which reported its results on February 21, reported its seventh consecutive decline in transaction volumes year-over-year — and this quarter, for the first time, was not offset by growth in average transaction volume. The company’s stock price fell more than 7% on the news. Shoppers’ baskets may get lighter when tensions hit the housing market: According to Barclays, one bank, the lower the asking price for real estate, the less consumers spend on the average trip to Home Depot.
After the outbreak of the epidemic era, investors expect retailers’ margins to narrow. Although the worst of the labor shortages have receded, wages remain high. In the case of Walmart and Home Depot, they’re on the rise. In January, Wal-Mart announced wage increases that will bring its average hourly wage to more than $17.50. UPS, a bank, estimates such moves would cost the company about $1 billion annually. Home Depot said it would spend an additional $1 billion on increasing workers’ hourly wages.
The biggest concern is the potential decline in consumer demand. The tailwinds from strong family budgets, bolstered by pandemic savings and government handouts, will not blow forever. According to Goldman Sachs, another bank, households have spent a third of their spare savings and will spend another third by the end of 2023. Companies that were quick to flaunt pricing power last year, such as Home Depot and Walmart, are now more wary of rising prices, fearing that This is to keep shoppers away from shopping. Last week, Kraft Heinz, a food conglomerate, said it was mostly done raising prices this year. Even affluent consumers, who disproportionately drove retail sales growth in 2022, are feeling the pinch, as Wal-Mart’s success shows with them. It is all too easy to imagine Mr. McMillon’s discerning shoppers turning into frustrated shoppers. ■
