Retailers are facing challenges are consumers have already cut back on spending as worries about inflation and interest rates have dampened their enthusiasm.
Discretionary spending is likely to take a backseat as consumers prioritize spending on food, rent and energy costs.
Retail sales rose by 4% in April from March, according to data from the Department of Commerce, but fell below analyst expectations of 0.8% growth. On an annual basis, retail spending grew 1.6% in April, marking the weakest year-over-year increase since the early days of the pandemic.
Even larger retailers such as Walmart WMT and Target TGT saw weaker discretionary spending as customers opted to spend money on necessities during the first quarter. Target CEO Brian Cornell said shoppers shifted their spending away from discretionary products during an investor call.
The main driver of economic growth is consumer spending. The Fed raised interest rates again in May, the 10th consecutive hike, in an effort to curb inflation rates.
Foot Locker Sales Drop
Apparel and footwear manufacturers have reported a slowdown and face further headwinds. Foot Locker’s (FL) – Get Free Report stock tumbled by over 27% on May 19 after it reported sales fell by 11.4% compared to a year ago.
Foot Locker reported sales plummeted to $1.93 billion, a decline of 11.4% from $2.18 billion a year ago. The company reported net income for the period that ended April 29 was $36 million, or 38 cents a share, compared with $132 million, or $1.37 per share, a year ago.
The footwear company slashed its forecast — revenue will fall 6.5% to 8% for the year, compared with a prior range of a decline of 3.5% to 5.5%. Foot Locker said comparable sales could dip by 7.5% to 9%, compared with a prior range of a 3.5% to 5.5% drop.
Lower tax refunds and high inflation rates pushed consumers to focus spending on rent, food and gas, CEO Mary Dillon said during an analyst call.
“Consumer demand, you know, has softened since investor day [earlier this year] and you know, signals are that we think that pressure will continue,” she said.
Shoppers are also using credit cards more to pay for their purchases, Dillon added.
But Foot Locker began marking down merchandise in April to attract shoppers. The discounts, along with an increase in retail theft cut into profit margins by four percentage points during the first quarter compared to a year ago.
Foot Locker is not the only retailer to feel the squeeze in profit margins.
In March, Nike reported it beat Wall Street‘s expectations, but was taking a “cautious approach” as it dealt with both a glut in inventory caused by supply chain woes from the global pandemic and lower sales from China as the country reopened in January.
Foot Locker reported a “constrained supply” of Nike’s products.
“The mix outside of Nike was 35% this quarter, that was up a couple of points so we do feel like we are making progress and diversifying the brand portfolio,” said Robert Higginbotham, the company’s outgoing CFO. “We haven’t given targets for the Nike or vendor mix penetration by year. We still very much expect to, over time, by 2026, reach over 40% in our mix with other vendors.”
Household Spending Slumps
Abercrombie & Fitch, Kohl’s, American Eagle, Gap and Ralph Lauren are reporting earnings next week and could reveal further consumer sentiment.
Inflation and interest rates both remain headwinds in household spending along with “softening but solid job and wage gains, declining household wealth due to falling home values and stock prices, and a weakening in home-related purchases as the housing market contracts,” said Gus Faucher, chief economist at PNC. “In addition, consumers bought a lot of goods in the early stages of the pandemic recovery, leaving less need to purchase goods now.”
Retail sales are expected to decline even more as the labor market “continues to soft and as interest rates remain elevated, and then decline later this year as the U.S. economy enters into a mild recession,” he said.
Sales in the retail sector are expected to improve in 2024 as the Federal Reserve starts to lower interest rates and an economic recovery starts, Faucher said.
Consumer Sentiment Weakening
Consumers feel worse about the outlook on the economy and have started to spend less money on food and clothing as inflation concerns remain, the Federal Reserve Bank of New York said in its survey on May 12.
Sentiment about the economy fell to 57.7 in May, marking a six-month low in May.
While inflation has declined, some, consumers fear that it is here to stay. Medium-to-long term inflation expectations recently reached a 12-year high, Shannon Seery, an economist at Wells Fargo Economics wrote in a May 12 report.
Inflation declined to the slowest pace in two years last month. The headline consumer price index for the month of April was estimated to have risen 4.9% from last year, according to the Bureau of Labor Statistics, down from the 5% pace recorded in March and the first dip below 5% in at least two years.
“Measures of consumer optimism have remained under pressure since the start of the pandemic amid a lingering uncertainty,” she wrote. “We suspect there are multiple things currently weighing on the mood, such as higher interest rates, still-high inflation and growing concern over the debt ceiling.”
Consumers are relying on their credit cards and installment loans again to pay bills each month as balances for both types of debt reached record- or near-record highs.
Balances for credit cards in the U.S. reached $917 billion in the first quarter, almost a 20% increase year-over-year as consumers struggle to pay their bills with higher inflation rates and interest rates, according to TransUnion’s latest report examining consumer spending during the first quarter that was published on May 11.
“As inflation rose to near 40-year high levels, many consumers have used credit to help manage their budgets, leading to record- or near-record high balances,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion.
Sentiment among consumers could continue to be weak as repayment for federal student loans could start as soon as August “if the debt relief program has not been implemented and the litigation has not been resolved,” said Federal Student Aid, a part of the U.S. Department of Education. The Supreme Court must issue a ruling by June 30, which means the clock for payments and interest could start within a few months.