Quarterly Earnings Recap: Understanding the Latest Consumer Trends Impacting Retailers Ahead of Holiday 2023

The latest retail earnings reports in recent weeks provided new insight into current economic conditions and the U.S. retail landscape, offering marketers a closer look at the macro forces influencing purchase decisions and overall business health heading into the holiday season. 

Consumers are under increasing financial pressure and have become more selective in their discretionary purchases, a trend likely to continue as student loan payments resume this fall for millions of Americans.

The prevailing economic uncertainty throughout 2023 brings new challenges for retailers in the latter half of the year, including increasing reports of theft (referred to as shrink), more brand credit card delinquencies, and a slowdown in big-ticket purchases across retail categories.

Despite the majority of retailers reporting lackluster earnings, a few standouts reported positive performance, primarily due to rising popularity among new audiences and operational efficiencies, showing there is still an opportunity for brands to capitalize on persevering consumer demand and capture the attention of a more cautious consumer.

In recent months, economic momentum largely replaced fears of a U.S. recession as strong travel demand, rising retail sales, a robust labor market, and increasing wages characterized much of the summer season and led to an overall improvement in consumer confidence and spending patterns.

In August, the Biden Administration celebrated the first anniversary of enacting the Inflation Reduction Act, citing “Bidenomics” for delivering lower costs for families and spurring economic growth across sectors. Retail sales, in particular, saw a midsummer boost in July from special deal days like Amazon Prime Day and Target Deal Days and further supported back-to-school shopping.

Many economic signals report similar trends, though recent weeks have seen a demonstrable change as growth in consumer spending slows and confidence declines. As reported by Bloomberg, the latest U.S. consumer confidence reading “fell by the most in two years [last month], as souring views on the labor market, high borrowing costs, and lingering inflation curbed optimism” and put rate-sensitive purchases “out of reach” for many households.

National Retail Federation (NRF) Chief Economist Jack Kleinhenz summarized in the August issue of the NRF’s monthly economic review that “there are ongoing economic challenges and questions, and the pace of consumer spending growth is becoming incrementally slower.”

Earnings reports across retailers tell a similar story. Many retail companies noted in recent weeks that the environment for consumers, especially among aspirational consumers and low-to-middle-income families, remains challenging, as American families face persistently higher costs on necessities. This has dampened overall demand and sales among many retailers throughout the last few months.

Macy’s, Best Buy, Nordstrom, Foot Locker, and Dick’s Sporting Goods, to name a few, all reported muted earnings for the prior quarter, with executives indicating that increasing financial pressure has made shoppers more selective and price-conscious with their discretionary spending. 

In contrast, off-price retailers, such as Ross, Burlington Stores, Walmart, Dollar Tree, and TJX, reported an uptick in sales last quarter. However, many executives signaled that growth was primarily driven by deal-seeking and more shoppers opting for cheaper, private-label products. On earnings calls, executives like Burlington Stores CEO Michael O’Sullivan articulated that “lower-income shoppers [are] still under significant economic pressure.”

Among luxury retailers, Tapestry CEO Joanne Crevoiserat said that the company sees shoppers, particularly “the aspirational consumer…being more choiceful,” which has impacted conversion across its many fashion brands. Likewise, LVMH CFO Jean-Jacques Guiony recapped on the company’s earnings call that aspirational customers “are not shopping as much as they used to” on entry-level products, contributing to a drop in U.S. sales last quarter. 

High-priced goods at LVMH’s most expensive brands are holding up well in the U.S., though a slowdown began as Americans vacationed in Europe and bought luxury goods in Paris, Rome, or London instead of in the U.S. As reported by CNBC, LVMH’s sales in Europe grew 18 percent last quarter, with tourists accounting for “nearly half” of that growth, a comparable shift in spending to last year when Americans returned to international destinations as travel restrictions eased. 

The prevailing economic uncertainty throughout 2023 brings new challenges for retailers in the latter half of the year, including increasing shrink, more brand credit card delinquencies, and a slowdown in big-ticket purchases. On its earnings call, Macy’s executives said that shoppers are not “converting as easily” and have “more aggressively pulled back” on discretionary spending, which resulted in an overall decline in sales for the department store.

The New York Times reported that department stores’ credit card delinquencies at Macy’s, Kohl’s, and Nordstrom are on the rise, with an overall increase in nonpayments that suggests shoppers are stretched financially. 

Several major retailers also reported that their margins and profits were hit due to shrink, which denotes inventory lost through shoplifting and employee theft or misplacement. Several retailers, including Nordstrom, Dick’s Sporting Goods, Ulta Beauty, and Target, listed shrink as a growing concern. Nordstrom, for instance, reported that losses from retail theft were at “historic highs” and impacted quarterly sales performance. 

Lowe’s, which benefited from the DIY and home improvement boom during the pandemic, reported that demand is weakening among customers hailing from the general public, though sales among professionals, such as electricians and contractors, rose last quarter.

Home Depot reported similar consumer patterns. Executive Vice President William Bastek commented on the earnings call, “We continue to see softer engagement in big-ticket discretionary categories like patio and appliances that likely reflects both pull-forward of these single-item purchases and deferrals.”

A few notable standouts reported positive performance for the quarter, with executives citing rising popularity among younger consumers, inventory efficiencies, and integrated product and marketing strategies as growth levers. The inventory glut that clouded retailers throughout much of 2022 and into 2023 is finally showing signs of stabilization. While sales last quarter fell for Home Depot and Target, profits were above analyst expectations, largely due to improvements in inventory positioning and supply chain efficiencies. 

Kohl’s also saw significant improvements in managing inventory levels and reducing waste, and Abercrombie & Fitch attributed year-over-year gains to lowered inventory levels and improved operational efficiencies.

Brand positioning and integrated strategy activations were highlighted as growth drivers last quarter among winning retailers. Chewy, Lululemon, and Coach, to name a few, listed significant investments in brand awareness and integrated partnerships among strategic shifts that are paying off on the bottom line.

Abercrombie & Fitch saw strong demand for its product assortment across Abercrombie & Fitch and Hollister, raising annual sales forecasts after quarterly performance beat expectations. Insider Intelligence analyst Rachel Wolff outlined in a recent report that “a lot of retailers are keeping their outlook conservative…[however] Abercrombie & Fitch has been able to keep up with the consumer as they change, lean into trends, and have the ability to chase demand instead of taking promotions” as its brand positioning and product catalog evolves so customers can easily wear the brand from work to their weekend getaway.