The retail industry has had a bit of a tough time in the past few months as inflation has peaked and consumer shopping patterns have changed. As costs came under pressure, demand for essentials increased and the desire for value grew. This resulted in some types of tenderness and pressure on the edges. Here’s a look at some of the latest trends experienced by a few leading retailers and their near-term prospects:
Rising costs and cost pressures
The hallmark of the past few months has been inflation, which has remained at high levels squeezing the spending power of consumers. Consumers have chosen to focus more of their spending on essentials and hold off on discretionary purchases.
In such an environment, retailers like Target (NYSE: TGT) benefited from having a balanced multi-category portfolio as gains in categories such as food & beverages, home essentials and beauty helped offset softness in discretionary categories. This helped the retailer post a 3% growth in total revenue in the third quarter of 2022.
The inflationary environment has led cost-conscious consumers to turn to discount retailers such as Dollar Tree.Nasdaq: DLTR) and Dollar General (NYSE: DG) for higher value on their purchases. In Q3 2022, Dollar Tree and Dollar General grew their net sales by 8% and 11%, respectively, compared to the same period a year ago. Both discount retailers posted same-store sales growth of 6% in the quarter. They have also seen their consumables categories perform better than discretionary categories amid current inflation.
Many retailers saw their margins negatively impacted by heavy promotions and discounts and changes in product mix. Target and Macy’s (NYSE: M) their gross margins have been affected by promotions and clearance markdowns. Target’s gross margin ratio fell to 24.7% in Q3 as customers opted to shop at discounted prices instead of full-price purchases.
Macy’s Q3 gross margin fell 230 basis points to 38.7% year-over-year due to increased incentives and clearance markdowns to sell lower-moving categories such as casual wear and warm-weather seasonal goods.
Margins were also impacted by a higher portion of sales coming from the lower-margin consumables category. Dollar General’s gross margin fell 27 basis points to 30.5% in Q3 as consumables made up a higher proportion of sales. Margins were also affected by markdowns and inventory shrinkage. Dollar Tree’s gross margin increased 240 basis points to 29.9% in Q3, but was still hurt by consumables, higher shrinkage and markdowns in the product mix.
In the fourth quarter of 2022, Target expects softness in preferred comps and pressure on discount margins. Weakness in the discretionary segment is expected to be partially offset by strength in the frequency businesses. Macy’s expects Q4 sales of $8.1-8.4 billion.
Dollar Tree expects its net sales to be between $7.54-7.68 billion in Q4 and its same-store sales to increase in the mid to high single digits. Dollar General expects its same-store sales to grow 6-7% in the fourth quarter.