Walmart and Home Depot launch retail revenue this week

After enjoying a shopping spree in the age of the pandemic, retailers are bracing for a reality check.

walmart And Home deposit will kick off retail earnings season on Tuesday by sharing holiday quarter results. Other major retailers will follow, including big-box players like Target And best buyand commodities like Macy’s And Gap.

Corporate reports will come as recession fears cloud the year ahead. Americans are more concerned about inflation now than they are about Covid. People are choosing to spend more on restaurants, travel and other services while reducing their purchases of goods. Rising interest rates threaten the housing market.

A slowdown in sales growth also seems likely after the strong increases of the past three years.

For investors, the end of the retail sugar boom offers a mixed picture. Companies may share modest sales prospects. Still, healthier profit margins could be a silver lining, as transportation costs drop and retailers have less excess merchandise to mark down. Additionally, Walmart businesses may have more conservative spending plans, such as smaller inventory orders and slower hiring. This could increase profit margins, even if consumers are not spending as freely.

“The world is focused on revenue momentum,” said David Silverman, retail analyst at Fitch Ratings. “So many market participants are focused on what is income, what is income, what is income.”

But, he added, “it’s operating profit that could well rebound after a difficult 2022.”

Silverman said retailer strategies have changed over the past year. Then they bet on sky-high sales becoming the new norm and made riskier bets, going from larger orders to paying extra to expedite shipments. This hurt business margins as unsold goods ended up on the clearance rack and costs soared, along with sales.

Already, retailers have a dose of reality. Walmart, Target and Macy’s are among the companies that have spoken of a more cautious consumer.

Several retailers have already previewed the holiday results. Macy’s warned holiday quarter sales would be softer than its expectations. Nordstrom said weaker sales and more markdowns hurt its November and December results. lululemon said its profit margins would be lower than expected as the sportswear retailer juggles excess inventory.

Industry-wide holiday results also fell short of expectations, according to the National Retail Federation. Sales in November and December rose 5.3% year-over-year to $936.3 billion, below the major trade group’s forecast for growth of between 6% and 8% per year. compared to the previous year. In early November, NRF forecast spending between $942.6 billion and $960.4 billion.

Retail executives have been watching closely for clues as they prepare for the fiscal year ahead. (Most retailer fiscal years end in January.)

Macy’s CEO Jeff Gennette told CNBC last month that the department store operator has noticed fewer holiday shoppers buying items for themselves while shopping for gifts. He said these lower purchases “more than made up for the good news we were getting in terms of gifts and occasions.”

The company’s credit card data also showed warning signs, he added: Customer balances on co-branded Macy’s, Bloomingdale’s and American Express credit cards are increasing and more of those balances are being carried over to the next month rather than paid.

“When we look at our credit portfolio, you have a customer who is under more pressure,” he said.

Some retailers have already taken tough steps to prepare for what could be a tough year. Luxury retailer Neiman Marcus and Saks.com, the e-commerce retailer spun off from Saks Fifth Avenue stores, both recently laid off. stitch correction laid off 20% of its workforce. Wayfair laid off 10% of its global workforce. Amazon began cutting more than 18,000 employees, many of them in its retail division.

Bed bath and beyondwhich has warned of potential bankruptcy, recently further reduced its workforce by also closing around 150 of its namesake stores.

Target said in November it would cut up to $3 billion in total costs over the next three years as it warned of a slower holiday season. He did not provide details on this plan. The company will release its fourth quarter results on February 28.

Many retail executives said they are also planning cost-cutting measures for their workforce over the next 12 months, such as hiring temporary workers rather than full-time employees, according to a survey conducted. in December with 300 retail trade executives by the consulting firm AlixPartners. Thirty-seven percent said they expected a slowdown in raises or promotions and 28% said they expected a reduction in benefits at their company in the coming year.

Of those surveyed, 19% said layoffs had taken place at their company in the past 12 months and 19% said they expected layoffs to occur in the next 12 months.

Marie Driscoll, an analyst covering beauty, luxury and fashion for retail consultancy Coresight Research, said she expects companies to take a closer look at other elements of the line, such as free shipping and returns, and digital marketing expenses.

As interest rates rise, she said retailers may “find a religion of exploitation.”

“Retailers are looking at their businesses and saying not all sales are worth it,” she said. “The fact that there is a real cost of money changes the way companies think about their business.”

Still, some factors still work in favor of retailers, she said. The tight labor market could give consumers the confidence to spend, even if inflation remains elevated. People are dressing up and buying perfumes when they go out again, a factor that may have boosted January retail sales as well as spending in bars and restaurants.

She said earnings season will bring surprises and show which companies can navigate rougher waters. Nikefor example, raised its outlook after beating Wall Street expectations in December.

“A lot of it depends on their consumer and how strong their brand is,” Driscoll said. “There is strength there.”