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The retail industry has had a tough time in recent months as inflation peaks and consumer spending patterns change. When spending is squeezed, demand for essentials increases and choices for value increase. This has led to softness in certain categories and pressure on margins. Here are some of the new trends experienced by some of the leading retailers and their near-term expectations:
Rising costs and spending pressure
A hallmark of the past few months has been inflation that has remained at a higher level which has put pressure on consumers’ spending ability. Consumers have chosen to focus more on spending on essential items and put discretionary purchases on hold.
In such an environment, retailers like Target (NYSE: TGT ) benefit from having a balanced multi-category portfolio as gains in categories such as food and beverage, essentials and beauty help offset softness in discretionary categories. This helped the retailer increase its total revenue by 3% during the third quarter of 2022.
The inflationary environment also led cost-conscious customers to turn to discount retailers like Dollar Tree (NASDAQ: DLTR ) and Dollar General (NYSE: DG ) for more purchases. In Q3 2022, Dollar Tree and Dollar General saw net sales increase 8% and 11%, respectively, compared to the same period a year ago. Both discount retailers recorded same-store sales growth of more than 6% during the quarter. He also saw the consumables category outperforming the discretionary category amid persistent inflation.
Margin hit
Many retailers saw their margins negatively impacted by heavy promotions and discounts as well as changes in product mix. Target and Macy’s (NYSE: M ) saw gross margins hurt by sales and clearance declines. The target gross margin rate fell to 24.7% in Q3 from 28% in the year-ago quarter as customers opted to buy at discounted prices instead of making full-price purchases.
Macy’s Q3 gross margin fell 230 basis points YoY to 38.7% due to increased promotions and clearance markups to sell lower-priced categories such as casual wear and warmer-weather seasonal items.
Margins were also impacted by a higher share of sales from lower-cost consumables categories. Dollar General’s gross margin fell 27 basis points in Q3 to 30.5% as fuel made up a larger proportion of sales. Margins are also affected by markdowns and shrinking inventory. Dollar Tree’s gross margin improved 240 basis points to 29.9% in Q3 but was still impacted by a shift in product mix to consumables, shrinkage and higher markdowns.
Outlook
In the fourth quarter of 2022, Target expects to see softness in discretionary comps as well as pressure on margins from discounts. Weakness in the discretionary category is expected to be partially offset by strength in the frequency business. Macy’s expects sales of $8.1-8.4 billion in Q4.
Dollar Tree expects net sales to be between $7.54-7.68 billion in Q4 and same-store sales to increase in the mid to high single digits. Dollar General expects same-store sales to grow 6-7% in the fourth quarter.
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