If the last few weeks have been any indication, retailers are in for rough earnings period next week.
Walmart, Target, TJX Companies, Kohl’s, On, Foot Locker and more retailers are up next to report their financial results for the most recent quarter. In advance of the announcements, some have preemptively downgraded their outlooks, given current headwinds in the economic environment such as inflation, lack of stimulus funds and recession fears.
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Here are three themes to expect to surface during earnings next week.
Headwinds from inflation
Inflation has only recently begun to show signs of cooling, with consumer prices growing 8.5% in July from a year ago, down from its 40-year high of 9.1% a month ago. However, retailers reporting results for Q2 have indicated that a slowdown in consumer spending has impacted their businesses.
Walmart in July slashed its outlook for Q2 as consumer spending softened, especially in discretionary categories like apparel. As a department store retailer, Kohl’s will likely also report a similar impact on spending in Q2.
“For Q2, we have seen a tightening on spending with diminishing interest in discretionary items. This will weigh on department store Q2 earnings,” said analysts from Jane Hali & Associates (JHA) LLC in a note to clients.
Given the slowdowns in spending, companies have been reporting higher-than-usual levels of inventory. At Walmart, an increase in food prices has led to more inventory in the apparel category. Target warned that sales slowed in categories such as home, electronics, sporting goods and apparel as consumers spent more across essential categories like food and beverage.
In June, Target cut its guidance for Q2 and rolled out a plan to shed its excess inventory with additional markdowns. Walmart has announced similar measures.
Strength for off-price
As consumers curb their spending, retailers that offer the best value — such as off-pricers — will likely be in a strong position.
“We believe off-price will benefit from a trade-down scenario as consumers face inflation and a possible recession,” JHA said, noting TJX Companies’ strong product assortment.
In May, TJX Companies, parent to Marshalls, T.J. Maxx, and Home Goods, reported upbeat quarterly results, with earnings of $0.68 ahead of estimates of $00.6%. Net sales were $11.4 billion, up 13%.
Consumers will likely turn to off-price channels to complete shopping for the back-to-school season as well, experts have noted.
“Off-price retailers are always prepared for back-to-school,” said Brett Rose, CEO of United National Consumer Suppliers, which sources products to several off-price retailers, including Ross Stores and some TJX-owned locations. Many consumers will turn to off-price stores as their first choice to find certain “brand agnostic” items like notebooks and pens, he said.