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Wednesday, October 4, 2023

Black Friday, a blue litmus test for US retailers

America’s annual ‘Black Friday’ shopping festival that kicks off next Friday, the day after Thanksgiving, will be a major test for American retailers.

In fact, the holiday selling season is shaping up to be the most bewildering in years, as a combination of rising inflation, gluts of stocks and higher interest rates test shoppers’ resilience in a way that it had not been tested in decades.

Retail sales momentum is strong, as we saw in this week’s October report, but key chain performance is a mix of good and bad, as we saw in quarterly reports from Walmart and Macy’s (good) and Target and Kohl’s (bad).

Inflation, while still a problem, is beginning to subside; Supply chain problems have been largely overcome, but many retailers have tens of billions of dollars of unsold inventory at a time of rising interest costs, which in turn will put enormous pressure on profit margins in the run-up to Christmas as retailers big and small come under pressure to clear the decks.

And in the 2022 selling season, brick-and-mortar retailers won’t be elbowed aside by more aggressive online operations like Amazon.

The likes of Amazon is no longer the ogre, just another competitor, and judging by how its share price has tanked this year, it’s not very successful at it.

Amazon usually advances one Prime Day (a gigantic online sale) a year. In 2022, it has had two to try to fuel sales growth: one in July and one in October, as well as its Cyber ​​Monday sale on November 28. However, that is now being delayed for a longer period.

While companies like Amazon, Target and Kohl’s have struggled, overall retail sales have been more than good.

This week, US retail sales rose much more than expected in October, across all major measures, as US consumers spent heavily, excluding some discretionary sectors.

And yet, the loot from that increase was not evenly distributed and we saw two very conflicting results from America’s #1 and #2 retailers, Walmart and Target.

Walmart did much better than expected in its third quarter, which includes October, while Target did much worse; in fact, it’s struggling, and shares fell more than sharply this week, while Walmart’s rose.

And it was a similar story in the US department store sector, where Macy’s, the largest chain, reported better-than-expected sales and profits and a strong outlook, while rival Kohl’s missed the mark and lowered it. did wrong.

Walmart reported a 9% increase in sales for the quarter, reduced its overstock, saw customers respond favorably to aggressive pricing and raised its forecast for the final quarter and final year. Comparable store sales increased 8.2%, above inflation in the same period.

In stark contrast, Target slashed its fourth-quarter forecast as net income fell 50% from the same quarter in 2021, with the drop fueled by assumed losses from getting rid of excess inventory. Target also revealed plans to cut $3 billion in costs over the next two years; Walmart did not.

And yet, retail sales data supports Walmart’s better-than-expected performance rather than Target, which is looking more and more like poor management execution.

The US Commerce Department said retail sales rose 1.3% in October, much faster than the 1% rise predicted by the market and a steeper increase compared to September’s flat result.

Analysts said it was surprising that US consumers were not spooked by more Federal Reserve rate hikes, stubbornly high inflation and the run-up to the spiteful midterm elections earlier this month.

Excluding a 1.3% increase in motor vehicle sales, retail sales still rose 1.3% on the month, again much faster than an expected 0.5% increase.

That followed September’s 0.1% rise. It was also the biggest monthly rise since February, that is, before Russia’s invasion of Ukraine triggered a worldwide spike in inflation.

Ignoring both motor vehicles and the 4.1% increase in sales at gas stations in the month due to high prices, retail sales rose 0.9% in October after rising 0.6% in September.

In particular, the increase was driven by a 1.6% increase in restaurant and bar sales and a 1.4% increase in grocery store sales.

There were also notable increases in furniture, building materials and non-store retail sales.

But consumers cut spending at electronics and appliance stores, sporting goods retailers and department stores, according to the Commerce Department report.

In the department store sector, the Macy’s and Kohl’s quarterlies showed a split similar to that of Walmart and Target.

Macy’s raised its full-year profit forecast on continued strong shopper demand for its mix of high-end clothing and beauty products, while inflation pressure on low-income shoppers forced rival Kohl’s Corp to drop your prognosis.

Sales of luxury items (which are discretionary items) have held up for Macy’s as wealthy shoppers returned after the pandemic to splurge on more expensive handbags, perfumes, clothing and gifts ahead of the holiday season.

But Kohl’s withdrew its annual forecasts as the company, which caters more to low-income customers and stocks fewer luxury items, was hit by weaker demand due to rising prices.

Inventories at Macy’s rose just 4% in the third quarter from a year earlier, thanks to its continued heavy discounting to clear excess stock of casual and leisurewear. Kohl’s inventories increased 34%. Kohl’s lost its CEO as a result on Thursday.

Kohl’s third-quarter comparable sales fell 6.9%, but net profit fell to just $97 million in the quarter from $243 million a year earlier.

Macy’s reported net income of $108 million for the quarter to October 29, below $239 million but better than expected. Sales fell 3.9% to $5.23 billion from $5.44 billion in the same period a year earlier, but that too beat expectations.

Comparable sales, established store and online, fell 2.7% compared to the prior-year quarter, but increased 6% compared to the third quarter of 2019, before the pandemic.

We’ll find out this time next January how the post-Thanksgiving period went and then in February how the various networks performed. The expected increase in deeply discounted sales (to get rid of unwanted products) is very likely to depress both November (late December) and December (late January) sales numbers.

Glenn Dyer

Glenn Dyer has been a financial journalist and television producer for more than 40 years. He has worked for Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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