The record-breaking inflation in America and the unstable labor market are affecting the behavior of consumers from different income levels. More and more are switching to cheaper brands and reducing spending on luxury, under the growing fear of a recession. The two leading retail giants in America, Walmart, which appeals to a wide audience with extremely cheap prices, and the higher-ranking Target chain, released their quarterly reports and presented completely different performances, which may indicate a broader trend in the American public.
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stock Walmart It had its best day since 2020 after the report was released, rising more than 6%, following higher than expected earnings. As a result, the retailer announced a positive revision of its financial forecasts and plans to buy back shares worth $20 billion. Walmart’s stock performance dragged rival Target’s stock along with it, which rose 3.7% on the day, only to drop 13.6% the next day, after it released disappointing reports.
Walmart posted an adjusted profit of $1.50 per share in the third quarter, while revenue rose 8.7% to $152.8 billion. This is compared to analysts’ estimates, who expected an adjusted profit of $1.32 per share from revenues of $147.7 billion. Walmart’s unadjusted operating profit fell 53.5% to $2.7 billion. However, with adjustments, operating profit rose 3.9% to $6 billion. Store sales in the third quarter grew by 8.2% year over year, above expectations for a 4.3% growth.
In contrast, the reports of Target They showed an operating profit that dropped by almost 50% in the third quarter, to $1 billion compared to $2 billion in the corresponding quarter last year. Earnings per share were $1.54 per share, well below consensus estimates of $2.16. Revenues in the quarter amounted to $26.5 billion, slightly surpassing estimates of $26.4 billion. Sales in chain stores increased by 2.7%, compared to an expected increase of 2.2%.
Target branch in Wisconsin / Photo: Reuters, Allen Fredrickson
Recession, but only for high income earners
The vastly different scenarios for the two leading retailers may point to a “white-collar recession,” in which high-income earners have the potential to take a bigger hit than low-income earners, even if their financial situation is better. In the current economic environment, of widespread waves of layoffs in white-collar professions in general and in the high-tech industry in particular, the greater the income – the more severe the damage. In addition, stocks, which are wholly owned by high income earners, suffered significant losses this year.
The earnings reports of both retailers paint a detailed picture of this dynamic. Walmart said on Tuesday that it was seeing increased activity among high-income consumers, and that sales of discretionary categories — such as clothing and furniture — were still lagging, as shoppers focused on fair value for money and staples. A retrospective examination of Walmart’s performance over the years is consistent with the conclusions emerging from the earnings reports, and shows that in periods of inflation, when consumers’ budgets are small, it actually profits. This pattern can be attributed to the retail giant’s focus on low prices and basic products, which make up a large percentage of sales. In contrast, competitor Target appeals largely to higher income earners, as more of its sales are based on discretionary consumption categories, i.e., luxury.
Following the better than expected results, Wall Street reacted accordingly. Walmart’s strong report resonated with major home improvement retailers such as Home Depot, whose results also managed to beat analysts’ estimates, and even pulled competitor Target up 3.7% in share value.
But a day later, Target already woke up to a different reality. The publication of its disappointing reports resulted in a 13% drop in the value of the stock. Its top- and bottom-line results were worse than expected, and management sounded a cautious note about the current fourth quarter. While food and home goods sales were strong, they were offset by significant declines in other categories. Target’s sales growth slowed to 0.9% last month from 4% in September, a slowdown that, if it continues, could turn the measure of consumer behavior for one of America’s most important retailers negative for the first time in five years. Shoppers are hitting the brakes on discretionary purchases, the company said, and even toy sales were disappointing this holiday season.
Inflation still hurts those with low incomes more
Of course, there’s no doubt that inflation, which is still high enough to worry most shoppers, is hitting low-income workers the hardest, as spending on basic goods now eats into a larger portion of their wages. Additionally, in a full recession, low income earners have fewer savings and assets to rely on. October retail sales data, released Wednesday, showed that energy and food prices remained high, forcing Americans to spend more on the same goods.
However, it is the low-income group, while hardest hit, that has continued to see larger wage gains and a stronger labor market, so they too may benefit disproportionately if inflation continues to fall from the decades-high it reached, as it did in October. The consumer price index data for the previous month, released on Wednesday, show similar dynamics in other sectors as well: spending on staples, fuel, eating out and personal care increased, while spending on hobbies, electronics and general merchandise decreased.
Retail income, the labor market and the economy cannot be considered separately. If the employment picture darkens more for high-income workers, it could reverse the trend of wealthier consumer resilience that has dominated retailing in recent months and lead to less glowing results in next quarter’s reports.