Good morning,
Consumer spending is something CFOs pay close attention to. From the projections of analysts to executives on earnings calls, this week has shown some signs of what may come.
Goldman Sachs analysts are predicting a slowdown in consumer spending, according to a note published on Saturday. “Alternative data indicates a slowdown in late April and early May, perhaps in response to tighter financial conditions and higher consumer prices,” the note stated. There was a “10-year low in consumer sentiment” in early May, which “suggests some of this weakness could continue in late May and possibly June,” according to Goldman.
The note also stated that “while $2.5 trillion of excess savings, solid job gains, and continued wage growth represent continued tailwinds for consumption growth, we are assuming a deceleration in services spending in May and June and an outright decline in retail spending in May.”
‘Feeling inflation pressures’
Major retailers releasing earnings reports are also providing insight into consumer spending.
Walmart, the biggest retailer in the world, reported its profits in the first three months of the year on Tuesday. “Consumers are feeling inflation pressures as evidenced by an increase in grocery private brand penetration,” Walmart EVP and CFO Brett Biggs said during the earnings call. Some Walmart shoppers are bypassing brand-name items in categories like lunch meat, bacon, and dairy. They’re selecting Walmart’s brand for groceries, which usually costs less.
There were “higher than normal” markdowns for general merchandise, Biggs said. “In Q1, unexpected markdowns pressured Walmart U.S. gross profit by about $100 million,” he said.
“As it relates to Walmart U.S. general merchandise (GM) sales, we knew that we were up against stimulus dollars from last year but the rate of inflation in food pulled more dollars away from GM than we expected as customers needed to pay for the inflation in food,” President and CEO Doug McMillon said during the call.
“The bottom line was below our expectations due primarily to three areas that negatively affected operating income in our U.S. businesses, both in Walmart and Sam’s club,” McMillon said. The three areas were wage expenses, general merchandise (GM) inventory level, and fuel costs related to the company’s supply chain, he said. “Each of these items represents about a third of our overall profit miss,” he noted.
For the quarter, Walmart’s net earnings was $2.054 billion, down 24.8% from $2.73 billion a year ago, about a 25% decrease. Some bright spots for the quarter were e-commerce sales grew 1%, and global advertising business grew over 30%. Walmart fell 11% in New York trading after the company reported earnings that lagged analysts’ estimates.
Target released its earnings on Wednesday. The profit margin was impacted by supply-chain problems and higher fuel costs. However, customer traffic remains healthy, the company said. First-quarter comparable sales grew by 3.3% on top of 23% growth a year ago.
Target reported $25.17 billion in the most recent quarter compared to an expected $24.49 billion. Meanwhile, earnings per share came in at $2.19, compared to analyst expectations of $3.07, Fortune reported.
“We are not happy with our current profit performance,” CFO Michael Fiddelke said on the earnings call. Their team is “laser-focused” on working to “quickly restore our business performance to where it should be operating over time,” Fiddelke said.
He’s also doubling down on Target’s ability to get back on track. “Nothing that is happening today has changed our long-run expectations regarding the ability of our business to grow.” The company’s view for a “long-run potential” for the business to “deliver an operating margin rate of 8% or higher over time” remains, he said.
McMillon noted during Walmart’s earnings call that things are uncertain right now.
“As I talk to people across the country and across the world, there seems to be more uncertainty now in a very fluid environment,” he said.
See you tomorrow.
Sheryl Estrada
sheryl.estrada@fortune.com
Big deal
A new report by Indeed gauges Gen Z and Millennial working habits. Gen Z respondents (82%) were more likely than Millennial respondents (39%) to say they have never worked in-person full-time. About 92% Gen Z employees said they feel like they are missing out on traditional workplace experiences, and 85% said they worry that they are at a disadvantage when it comes to learning professional “soft skills” due to never working in a more traditional full-time role. The research also found that millennials are 20% more likely to cite concern over missing out on leadership opportunities, and Gen Zers were 26% more likely to express fear over missing out on mentorship opportunities. The findings are based on a survey of 1,001 18-41 year-olds.
Going deeper
Motivator in Chief: Getting the Most from Your Team, a part of Wharton's Nano Tools for Leaders Series, provides action steps. It begins with understanding the three needs: achievement, power, and affiliation, according to the report.
Leaderboard
Michael LaCerda was named CFO at Tusk Venture Partners, which invests in early-stage consumer technology startups. LaCerda brings more than 15 years of experience in alternative asset management finance from his time at BlackRock, Blackstone and KKR. Tusk Venture Partners has closed its third flagship fund with $140 million in commitments.
Sean O’Neil was named EVP and CFO at Ocwen Financial Corporation (NYSE: OCN), non-bank mortgage servicer, effective June 13. O’Neil joins Ocwen from Bayview Asset Management, LLC, where he served as the company’s CFO since 2015. Prior to this role, he held a number of senior positions at financial institutions, including serving as group financial officer for Wells Fargo, Eastern Community Bank and as CFO for Wachovia’s Wealth Management Group.
Overheard
"Employers having the most trouble filling open positions are overwhelmingly offering poor-quality jobs. The highest quit rates are in accommodation and food services–an industry dominated by low wages, few benefits, and little employment security or stability."
—Maureen Conway, VP at the Aspen Institute and executive director of the Institute’s Economic Opportunities Program, writes in a Fortune opinion piece.
