Inflation's Chill Sets Retail Earnings Record

February 9, 2023

minute read

In the grocery store, shopping mall, or gas station, prices shape economic perceptions more than anything else. Consumers' response to sudden shocks to their household finances was likely reflected in the retail sector at the end of 2022.

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It is likely that the answer to this question is not good, as the December U.S. Retail Sales numbers indicate. Every retail category with the exception of groceries, building materials, and sporting goods took a hit in 2022 due to rising inflation.

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It's not the first time that retailers have faced challenges this holiday season. Workplaces, personal savings, and available goods were reset by a global health crisis in 2020. Another COVID-19 outbreak hit in December 2021, leading to lower sales than anticipated. After two years of near-zero rates, inflation peaked at 40-year highs at the end of 2022 after 10 months of spiraling inflation.

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Now that we know the big news, let's look at the details. As retailers report their Q4 results in the coming weeks, what will they see in terms of results? The worst days of the pandemic brought about an overall closure of consumers' wallets, or did they simply divert their spending toward travel, dining out, and other "experiences"?

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Remember that household developments can be a good indicator of what's to come for the global economy. It is estimated that 70 percent of the Gross Domestic Product comes from consumer spending.

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We'll look at a few trends that likely shaped the fourth quarter, starting mid-month, and predict what Q4 results may reveal:

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According to the U.S. Census Bureau, four out of the last five months saw retail sales fall. Despite the pandemic's impact on consumer spending, December served as a real eye-opener as many consumers cut back on their spending in the retail industry. There is probably no need for me to tell you what has happened with Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT), as well as spending on personal and business technology. In the coming weeks, we will get fresh numbers for retail sales in January.

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There is no sign that inflation has ended: The January employment figures made the market's ears prickle in more ways than one on February 3. The data showed that worker demand remained strong, indicating that customers still had money to spend. Retailers may have cheered these findings. In addition to wage pressures, retailers are also facing difficulties. Moreover, we need to question how much disposable income there really is. Among people who earn more than $100,000 per year, 63% live paycheck to paycheck, according to a study from PYMNTS and LendingClub. Several retailers may be forced to cut staffing and store counts if hiring and wage levels begin to decline, including a long-struggling Bed Bath & Beyond (NASDAQ: BBBY), which announced plans to close nearly 90 stores just last week.

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The effects of COVID-19 stimulus programs will likely be studied and debated for years to come: Revolving credit rates keep rising. When federal aid started shutting off in midyear 2021 and 40-year inflation kicked in, household savings (see Figure 2) lost a lot of stuffing. According to Bankrate, the average credit card rate increased 4 percentage points to an average of 20% since last March as prices rise. The company believes serious credit card delinquencies may reach their highest level since 2010 even though credit delinquencies are still at historic lows.

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The SANTA SLIDE has been rising since April 2022, which has forced shoppers to rethink their purchases. Retail's most important month, December was especially impacted by a steep drop in Advance Real Retail and Food Services Sales (RRSFS: FRED). Consumers did not do nearly as much spending in stores as they did online. The data comes from FRED, which is administered by the Federal Reserve Bank of St. Louis.

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As the unemployment rate fell steadily in the wake of the COVID-19 pandemic, the nation's Personal Savings rate (SAVERT: FRED) also tapered off. A rise in inflation followed. In order to make ends meet, some may resort to using their credit cards. These data are derived from FRED, which is operated by the Federal Reserve Bank of St. Louis.

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Year-end worrisome

Q4 retail earnings numbers are expected to be filled with surprises. Although we will have to wait and see, there have already been plenty of announcements regarding revised retail guidance leading up to the holiday shopping season.

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A drop in once-heavy holiday hiring was described in our Q3 Retail Earnings Preview as retailers grappled with wholesale prices, shipping costs, and supply chain problems.

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There were some interesting developments in certain retail subsectors as well, according to research.

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Across all 11 S&P 500® industry sectors, FactSet estimates the consumer discretionary sector has experienced the second-largest year-over-year loss of earnings, with -20.6%. Four of these six industries will decrease earnings by more than 10% compared to last year, with six of those six industries expected to decrease earnings year-over-year:

Retail sales through the Internet and direct marketing (-84%)
A drop of 30% in multiline retail
Durable goods for the home (-13%)
There was a -11 percent decline in textiles, apparel, and luxury goods

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The first bullet above comes with a big caveat, however. NASDAQ: AMZN is the name of the company. A disappointing earnings report from Amazon was revealed on Friday, and FactSet said the company contributed significantly to a decline in consumer discretionary earnings. AMZN would have accounted for 16.1% of the total Q4 earnings growth if it weren't for the company.

Therefore, digging deeper is key. Here are a few questions you should keep in mind while listening to retailers' earnings calls:

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For a long period of time, inflation and rate hikes will affect both lower- and higher-income employees. How will that affect retailers who serve customers with more discretionary income, such as Macy's (M) and Nordstrom (NYSE: JWN), or those who do not have as much discretionary income, such as Dollar Tree (NASDAQ: DLTR) and Walmart (NYSE: WMT)?

Are margins likely to improve this year considering they were squeezed throughout 2022?

In terms of issues such as inventory security, delivery costs, and last-mile delivery, where do retail supply chain challenges stand right now?

Consumers were shocked to find out that some retailers will be returning restocking fees and tightening their return policies this holiday season. Are such policies likely to continue? What were consumers' reactions?

How did retailers perform in retail technology investments by year's end, and where can these investments be expanded?

What will store hiring practices and brick-and-mortar strategies look like if the job market slows in 2023?

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Retailers like Walmart (WMT-red line) and Macy's (M-pink line) are still grappling with a slow economic recovery since inflation became last year's story. However, hair and cosmetic retailer Ulta (ULTA-gray line) surpassed analysts' expectations with its Q3 earnings and share price gains. How will other specialty niche retailers fare when Q4 earnings are released? These data were compiled by S&P Dow Jones Indices and Nasdaq.

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While consumers have been struggling with rising food and gas prices, they showed loyalty to WMT through Sam's Club warehouse operations this year. Since the pandemic, Walmart has seen an increase in membership and sales, so last month it announced it would open 30 stores in suburban areas where there are few Sam's Clubs. Having Sam's franchise expand is WMT's first major expansion in over a decade. Sam's isn't the only thing at stake. A spike in gasoline prices last year led to significant membership gains at Costco (NASDAQ: COST) and BJ's Wholesale Club (BJ).

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Lowe's and Home Depot

In the coming days, Home Depot (NYSE: HD) will release its earnings report on Tuesday, February 21, before the opening bell.

According to analysts, Q4 EPS should be $2.24 per share (an analyst consensus).
The company's EPS for the previous year was $1.78
In terms of EPS, we expect a 2.1% increase over last year
A $36.01 billion revenue estimate is expected for Q4 (based on analysts' estimates)
The company earned $35.72 billion in revenue last year

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It is expected that Lowe's Companies (NYSE: LOW) will release its financial results before the market opens on Wednesday, March 1.

The consensus estimate for Q4 earnings per share is $3.28 (based on analysts' estimates).
The company's EPS was $3.21 a year ago
We expect EPS to increase by 25.8% year over year
According to analysts, the company is expected to generate $22.78 billion in revenue in Q4.
Twenty-three billion dollars in revenue last year

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Existing home sales fell for the 11th straight month in late January as mortgage rates spiraled in 2022. Home improvement chains' rivalry is becoming more intense regardless of what happens with housing in 2023. Lowe's is trading at a discount to HD and has plans to raise its operating profit margin to 14.5% by around 2026. Trade Algo's reported that Lowe's trades at a discount to HD and the S&P 500.

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TGT (Target)

It is expected that the report will be delivered before the opening on Tuesday, February 28

A consensus analyst estimate of $1.39 per share for Q4 (analysts' consensus)
Earnings per share: $3.19 in the previous year
EPS change over the prior year: -56.4%
An analyst's consensus predicts $30.7 billion in revenue for Q4
Revenue from the previous year: $31 billion

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A major retailer reported inventory problems in Q2 of 2022, making it the first major retailer to signal trouble. According to TGT's Q3 report, the company expects comparable sales to decline for the first time in five years in Q4. Overstocking during the pandemic era led to TGT becoming the poster child for the harm it caused. The situation hasn't significantly improved, according to most analysts.

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Macy’s (M)

In early March, we expect to receive the report

Analysts' consensus Q4 earnings per share is $1.57
The company's EPS for the previous year was $2.45
A rise of –35.9% is expected in EPS from last year to this year
The company is expected to earn $8.25 billion in revenue for the fourth quarter (analysts' consensus)
The company generated $8.66 billion in revenue last year

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The company stated in early January that revenue would be at the low end of guidance, but CEO Jeff Gennette believes consumers will face continued pressure in 2023, especially during the first half of the year. In reference to the recent holiday season, he said that “the nonpeak holiday weeks were more lull than expected,” foreshadowing a disappointing retail sales report released on January 18.

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Nordstrom (JWN)

The report is expected to be released on Thursday, March 2, following the close of business

Analysts' consensus for Q4 earnings: $0.71
EPS for the previous year: $1.23
A change of –42.3% is expected in EPS year-over-year
Revenue is expected to be $4.33 billion in Q4 (analysts' consensus)
The company generated $4.49 billion in revenue last year

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After Nordstrom cut its full-year guidance because of the slow holiday season, GameStop (NYSE: GME) Chairman Ryan Cohen (pictured) has turned his attention to the Seattle-based department store retailer. According to Trade Algo, Cohen has taken a "major stake" in department store JWN, causing shares to rise more than 20%.

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Ulta Beauty (NASDAQ: ULTA)

A report is expected to be released before the opening on Thursday, March 2

Analysts' average EPS estimate for Q4: $5.57
Five-year average earnings per share: $5.41
The expected change in EPS for the year-over-year period is 3.0%
Analysts' average estimate of Q4 revenue: $3.01 billion
The company generated $2.73 billion in revenue last year

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One store that stood out last year was Ulta, a hair-and-beauty chain. All specialty and department stores are offering beauty products and services as workers return to work, interview for jobs, travel for business, or simply go out on the town. There were probably more holiday party events than ever during the Q4 holiday party season this year. As a result of the economy being mostly open and ULTA's operating margins expected to be back to pre-COVID-19 levels, Wells Fargo (NYSE: WFC) downgraded ULTA to underweight from equal weight in early January.