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 on the company’s Q2 conference call. 

The shift in consumer confidence happened quickly, much of it happened in Q2 and it left a deep impact on Walmart and Target’s earnings. Both alerted investors during the quarter that results would come in below previous forecasts.

The end results were divergent: Walmart beat its lowered forecast and analyst estimates, while Target disappointed investors even after dropping its guidance significantly during the quarter. But in many ways the stories were similar, with both retailers taking markdowns to manage demand declines in some areas. For example:

  • With consumers shifting more dollars to food, Walmart Chief Financial Officer John Rainey noted that its general merchandise inventory growth rate is down more than 15 percentage points from Q1. General merchandise’s contribution to Q2 sales mix was down 350 basis points.
  • As discretionary spending came under pressure, Walmart has canceled “billions of dollars” in planned orders to align inventory with demand. Rainey said the company is still reducing exposure to some areas, including electronics, home and sporting goods. 
  • Target came under margin pressure as sales of higher-margin categories such as apparel and home goods slowed.
  • Target, too, canceled planned orders as demand shifted away from many nonessential categories. The retailer said fall receipts for discretionary categories was reduced by $1.5 billion.

Things could be easing as we move through Q3. On the call, Rainey said that the back-to-school season was “off to a solid start” so far in the period, while sales at the end of July were strong — and better for the bottom line with better-than-expected costs. Notably, Rainey also said that “early Q3 traffic count was a bit stronger than what we have seen in the businesses in two months.”

Hopeful signs aside, 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.

As traffic improved, Walmart management held its guidance for the second half of the year, with estimates of comp growth of 4% in the U.S. for the full fiscal year. Target also stood by its prior guidance of top-line growth in the low to mid-single digits. 

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.

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. More specifically, grocery’s share of Walmart’s sales mix in the U.S. was up 300 basis points while general merchandise was down 350 basis points, the latter driving costly markdowns. 

The story was similar at Target, where food and beverage as a category is up 50% since Q2 2019 — amounting to an extra $1.8 billion. But the company took an 87% hit to its operating profit due in part to markdowns on discretionary items to clear floor space for faster-growing categories, including food and consumables — which, again, typically carry lower margins.

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