If there’s any retailer that has its finger on the pulse of the average U.S. consumer’s spending habits, it’s Walmart. And its CEO said consumers are holding back on spending on items they don’t need, while indicating that inflation will have a bigger impact on total holiday sales numbers.
“This Christmas, if you look at a top-line point of view, will look better because of inflated dollars than it actually is,” Walmart CEO Doug McMillon told Morgan Stanley Global Consumer and Retail Conference attendees on Wednesday. “If you look at units and the quality of the breadth of what sells at retail, as a retailer, we won’t feel great about the quality of this Christmas.”
McMillon said the retail giant identified consumer spending changes around March, particularly among people with household incomes below $50,000.
“They started prioritizing, so their dollars went to food and consumables and went to gasoline,” McMillon said. But their discretionary purchases are becoming more selective, with many opting to buy merchandise for their families, but not themselves.
“[Consumers] didn’t have to invest in home décor, for example. They didn’t have to buy a new sweater. And so general merchandising sales started really dropping off,” McMillon said. “And that pressure played through to higher income levels as the months went by. So you can see the behavioral change now with basically all income levels in the country, as people are more price-sensitive.”
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Erik Nordstrom sees ‘signs of strain’ on all customer cohorts
McMillon’s comments came after other high-profile retail execs from Nordstrom, Macy’s, Dick’s Sporting Goods, Capri Holdings and Crocs shared their insight on the impact of changing consumer behavior on their business.
Erik Nordstrom told conference attendees he saw “signs of strain on the customer across all customer cohorts” that is “most pronounced at the lower income level.” Nordstrom, CEO of the eponymous department store chain, said consumers are still responding to newness and higher-ticket items.
“It’s not a price thing where—for us, it’s not at all that lower price is doing well and higher-priced items are not doing well,” Nordstrom said. “In many cases, it’s the opposite…I think customers are being more selective, a little more careful in their purchasing.”
Where this has affected Nordstrom the most is at its off-price Nordstrom Rack business, which saw consumer demand taper off earlier this year.
“We started to see that [softness] late June, kind of through July. And we have seen signs of customer pullback, but it is most pronounced at the lower-income levels, which, again, is more the Rack customer,” the executive said.
The pullback shows up in promotions, said Nordstrom, who indicated the department store is still working through slower-moving product that was already on clearance.
“We’ve had to be more aggressive to clear that clearance product out and open up the space to bring in the second piece, which is a bigger proportion of these premium brands,” Nordstrom said. “There’s a lot of access, just great product out there right now. When times get a little tougher, there is more product out there available in off-price.”
Nordstrom noted that supply chain constraints forced the retailer to intentionally bring in holiday merchandise earlier this year. But he acknowledged that going forward, the company will have to save more open-to-buy dollars to spend closer to the season and “really chase product” amid the rapidly evolving consumer demand environment.
“The change in category performance over the last 18 months has been unlike anything I’ve seen. You think of the categories that were hot during the pandemic, home and activewear and everyone’s wearing yoga pants and slippers, and we sold a lot of that stuff,” Nordstrom said. “We didn’t sell many men’s suits or high heel shoes during that time. That shifted, and shifted in a hurry. You’ve seen excess supply of a lot of those pandemic-hot categories in the industry that people are looking to clear through.”
Macy’s CFO: ‘Luxury customer has been resilient’
Macy’s chief financial officer Adrian Mitchell echoed Nordstrom’s point on consumers responding well to newness in the holiday season, noting that the department store’s merchandise offering includes 65 percent new products when compared to last year. This is roughly 30 points higher than 2019 year-over-year totals, Mitchell added.
And the company is seeing variance of its own when it comes to consumer spending habits, particularly since it operates more upscale retail banners like Bloomingdale’s and Bluemercury, as well as an off-price venue in Backstage. Mitchell highlighted Bloomingdale’s and Bluemercury as standouts this year, suggesting that higher-income shoppers are still flocking to these properties.
“The luxury customer has been resilient,” Mitchell said. “The luxury customers have more capacity to spend, and they’re looking for quality brands at a great value.”
Mitchell pointed to consumer spend on travel and hotels as reason for optimism within Macy’s, also indicating that consumers still have access to credit. But he also noted that credit balances are high, which forces the retailer to monitor indicators of bad debt across its consumer base.
“Folks have already committed to be with family for the holiday, but post-holiday when they look at the credit card bill, they may think, ‘Am I going to save? Am I going to get back to saving? Am I going to spend more? Am I going to use my credit card more?’” Mitchell said. “There’s going to be some real important choices. As we think about the next season into spring, we have to be thoughtful about where the consumer is.”
Capri CEO: ‘We definitely are concerned about next year’
Capri Holdings CEO John Idol isn’t as bullish on upcoming consumer spending habits, despite labeling North American shoppers as “relatively healthy” right now. This is even more striking given Capri operates the upscale Michael Kors, Jimmy Choo and Versace brands.
The company said last month it would enact a broad price increase in the spring to salvage gross margins in the event consumer spending declines.
“We definitely are concerned about next year,” Idol said during the Morgan Stanley event. “And we don’t think we’re going to see it probably in this quarter or maybe a little bit into next quarter. But we think for the back half of next year, we’ve got to be cautious about what happens to the North American consumer, which has been very resilient.”
Idol also highlighted the strength of Capri’s European business, which caught his team by surprise. But he still expects a consumer pullback across all of the fashion house’s major markets.
“We just have this anticipation that [the European] consumer is going to be even more impacted than the North American consumer, in particular, because energy prices are much higher in Europe,” Idol said, adding that Europeans didn’t benefit from a major stimulus that helped bolster spending, unlike U.S. consumer in early 2021.
Idol’s concerns extend to China’s high-spending luxury market. He offered a “very pessimistic” outlook on the world’s second-largest economy, where covid restrictions that have gripped GDP are just starting to fall.
“We think that’s going to take a lot of time,” he said about the alleged upcoming restriction rollback. “We’ve been one of the companies all along saying it’s going to take longer and we don’t think there will be a recovery in China until 2024. At this point, we’re still anticipating negative impact throughout next year.”
Don’t call Dick’s Sporting Goods ‘discretionary’
Dick’s Sporting Goods doesn’t appear to be fazed by the current macroeconomic environment in the way many other discretionary retailers may be. For one, the company believes consumers will maintain their spending to support an active lifestyle, regardless of the current economic environment.
“We are not as much a discretionary category as people tend to think of us,” said Navdeep Gupta, executive vice president and chief financial officer, Dick’s Sporting Goods. “We are much more of a necessity, especially if you think of the core categories like team sports, active lifestyle and outdoor lifestyle. The habits that these consumers have adopted continue to remain resilient even in those economic times.”
Gupta looked to the past to illustrate his point that “we are not recession resistant, but we are pretty resilient,” invoking the rapid bounce back Dick’s experienced in 2009 during the Great Recession, when spending slid across the board.
Crocs hopes Hey Dude brings passion without the polarization
Crocs CEO Andrew Rees said that the foam footwear seller is relying on the passion of its consumer base to drive sales growth for the company’s Hey Dude comfort shoe label. Crocs, which acquired the relatively unknown commodity for $2.5 billion at the end of last year, expects Hey Dude to generate $1 billion in sales in 2023—one year earlier than expected.
While the Crocs brand has its “lovers and haters,” Rees believes Hey Dude can generate similar buzz while maintaining broader appeal. Why? For starters, the average Hey Dude consumer already owns four pairs of the company’s shoes.
“If you took a Converse, which is a 100-year old-brand, your average in-closet ownership of somebody who owns Converse is slightly less than two pairs,” Rees said. “This is a brand that’s only existed, only been on this planet for five years, and has four pairs in the closet for its existing consumers. What that tells you is there’s tremendous passion.”
With this passion in mind, Rees sees opportunity to expand Hey Dude further into categories where it has small market share. The brand is expanding its offering of boots in fall 2023, and the CEO hinted at a wider sandal opportunity ahead.
“I think the current sandals are weak, and we can do a lot more with them,” Rees said.
“We learned some lessons from the earlier period at Crocs when they were trying to diversify,” Rees said. “We think a sequence-and-cadence approach to that is important, because if you’re going to go after a particular silhouette, whether it be a CVO [Circular Vamp Oxford], a lace-to-toe, a slip-on or even a running silhouette, I think you’ve got to build out that portfolio and try and own that share of shelf. You can’t ‘scattergun.'”
For now, the company is focusing on growing the Crocs and Hey Dude, with Rees saying that new acquisitions are “really not a priority” in the immediate future.
McMillon: Walmart has ways to go to reel in high-spending shoppers
Walmart’s McMillon also touched on the spending habits of higher-end consumers with household income above $100,000. For the most part, these consumers drove market share growth at Walmart over the past two quarters via food and consumables purchases, but are still going elsewhere for general merchandise.
“Our challenge is to have market shares that look more consistent across the whole assortment,” McMillon said. “We sell a lot of units of bicycles. We sell a lot of units of televisions, but we don’t sell as much in home and apparel and some hardlines categories as we could.”
The Walmart CEO also touched on pricing levels across the retailer, revealing that grocery consumables maintained “stubborn” mid-double-digit inflation, but that general merchandise is headed in a more promising direction.
“General merchandise is coming down,” said McMillon. “Our cost-of-goods inflation for general merchandise across hardlines and apparel is still there. We still have an inflated price, but it’s single-digit and the trend lines coming down. [General merchandise] is reacting to demand.”
Walmart says retail crime has consequences
But higher prices could be in play if retail crime and especially theft continue to plague Walmart, McMillon said Tuesday on CNBC’s Squawk Box.
When asked about how local jurisdictions handle shoplifting cases, McMillon said a lax approach from prosecutors could impact prices and even lead the retailer to close stores in the future.
“If that’s not corrected over time, prices will be higher, and/or stores will close,” McMillon said. “It’s really city by city, location by location. It’s store managers working with local law enforcement and we’ve got great relationships there for the most part.”
Last month, chief rival Target revealed that shoplifting has jumped about 50 percent year-over-year, leading to more than $400 million in losses in this fiscal year alone that could balloon to as much as $600 million.