and Target’s widely mixed earnings reports this week offer some clues as to which consumers see a greater impact from recession fears.
Historically, Walmart (ticker: WMT) has benefited when inflation or economic weakness weighed on shoppers’ budgets by focusing on low prices and a higher percentage of sales in consumer staples. Target (TGT), on the other hand, is largely associated with higher earners, as more sales come from discretionary categories such as apparel and homewares.
The vastly different scenarios for the two retailers suggest that higher earners may suffer more in the current economic environment, even if they are doing better overall.
Spending patterns at the two major retailers indicate that wealthier Americans might feel wary after big layoffs in tech and other white-collar jobs, and as stocks — which they mostly own relative to low-paid workers — have taken a hit. Individually counting, there were more than 1,000 rounds of layoffs this year in the tech industry alone. And how Barrons has already noted Job losses cut much deeper in American spending than inflation, even when the latter is at record levels.
Inflation doesn’t help either. In May, Barrons noted that Target’s disappointing first quarter showed in part that even higher-income Americans were not immune to inflation– the results of the last quarter reflect this once again.
Strategists at PGM Global highlighted in a note Wednesday how the math has turned against some of the better-paid Jobs.
“While those with the highest incomes are bearing the brunt of job losses, equity investors who are overweight large-caps are [are] experience similar pain as those gains erode faster,” the strategists wrote. “This is the recession of the rich.”
Of course, inflation has undoubtedly hurt low-income workers the most, since spending on basic necessities now makes up a larger portion of their paychecks. And in a full-blown recession, they have fewer savings and assets to rely on. However, the group continues to see larger wage increases and a stronger labor market. This means lower-income Americans might also be able to benefit disproportionately Inflation continues to fall as in October from the highest levels in several decades.
The results from Walmart and Target paint a more detailed picture of this dynamic. For its part, Walmart said Tuesday that it was seeing buoyant business from higher-income shoppers and that discretionary category sales were still lagging as shoppers focused on value and essentials. The retail giant too increased its full-year results guidance and initiated a $20 billion buyback program on top of strong third quarter results. It is strong report was repeated from the big ones Home Improvement Retailer
), the results of which also exceeded analyst estimates.
Target was by far the underdog: his top and bottom line results were worse than expected, and management commented cautiously on the current fourth quarter. While sales in food and housewares were strong, this was offset by weakness in the consumer staples categories.
Of course, it’s important not to oversimplify. October is Retail sales figuresreleased on Wednesday showed that higher gas and food prices are still forcing Americans to spend more on the same goods, and inflation is still high enough to worry the majority of shoppers.
But the data also showed that Americans are still willing to eat out and spend if inflation gives them breathing room. Lowe’s said so when it realized its consumers weren’t bargaining at all — unlike those wealthy Walmart bargain hunters.
That leaves us with a scenario where there are “two major American retailers with two completely different perspectives on the consumer,” notes Bespoke Investment Group.
We’ll need more data from retailers’ multiple earnings reports to confirm if that’s the case or if the discrepancy is more related to company-specific missteps at Target.
It is impossible to separate retail spending, the labor market and the economy. If the employment picture darkens more for higher-income workers, it could reverse the trend that has dominated retail for the past few months – namely the resilience of wealthy consumers even as demand from the lower-income cohort crumbled.
In other words, retail would remain bifurcated between the haves and have-notsbut their positions would change.
But one thing has also come true in 2022: It doesn’t pay to paint the entire trade with one brush.
Write to Teresa Rivas at firstname.lastname@example.org