Retailers could face cost cuts and slower sales this year

After profiting from a pandemic-era shopping spree, retailers are preparing for a reality check.

walmart And home depot Retail earnings season will kick off on Tuesday by sharing holiday-quarter results. Other big-name retailers will follow, including big-box players Target And best Buyand mall staples like Macy’s And Difference,

Companies report will come like this fear of recession Clouds for the coming year. are american more worried About this inflation now than they are about covid. People are preferring to spend more on eating out, travel and other services while cutting down on stuff. high interest rates threat to the housing market,

There also appears to be a slowdown in sales growth after the rapid growth of the past three years.

The end of retail sugar highs paints a mixed picture for investors. Companies may share a modest sales approach. Yet healthy profit margins may be a silver lining, as freight costs decline and retailers have less excess inventory to markup. At the same time, Walmart companies may have more cautious spending plans, such as smaller inventory orders and slower hiring. This can increase profit margins even if consumers do not spend freely.

“The world is focused on top-line momentum,” said David Silverman, a retail analyst at Fitch Ratings. “The focus for so many market participants is what’s revenue, what’s revenue, what’s revenue.”

But, he added, “it is operating profit that could well bounce back from a difficult 2022.”

Silverman said the retailers’ strategy has reversed from a year ago. Then, they bet on the high sales that became the new normal and made risky bets from placing large orders to paying extra to expedite shipments. This hurt the margins of companies, as unsold goods along with sales fell on the clearance racks and increased costs.

Several retailers have already previewed the holiday results. Macy’s Warned that holiday-quarter sales would come in on the lighter side Its expectations. nordstrom said Weaker sales and higher markdowns It hurt its November and December results. Lululemon said its profit margin will be lower than estimated, as the athletic apparel retailer adds excess inventory.

Industry-wide Holiday Results fell short of expectations, too, according to the National Retail Federation. Sales rose 5.3% year over year to $936.3 billion in November and December, well below the leading trade group’s forecast of between 6% and 8% growth from the prior year. In early November, the NRF had Estimated spending between $942.6 billion and $960.4 billion,

Retail leaders have watched closely for clues as they prepare for the coming fiscal year. (Most retailers’ fiscal years end in January.)

Macy’s CEO Jeff Gennett told CNBC last month that the department store operator saw shoppers shopping less during the holidays than when shopping for gifts. He said the reduced purchases “were more than offset by the gifts and good news on the occasion.”

The company’s credit card data also showed warning signs, he said: customers’ balances on Macy’s, Bloomingdale’s and co-branded American Express credit cards are rising and those balances are being carried over to the next month instead of paid in full. .

“When we look at our credit portfolio, you’ve got a customer that is coming under more pressure,” he said.

Some retailers have already taken some tough steps to prepare for a tough year ahead. luxury retailer Neiman Marcus and e-commerce retailer Saks.com out of Saks Fifth Avenue stores, Have both been laid off recently? stitch fix laid off 20% of its corporate workforce, wayfair laid off 10% of its global workforce, Amazon began cut more than 18,000 employeesInvolved Several in its retail division.

bed Bath and BeyondWho has warned of possible bankruptcy, has recently cut down on its workforce as it is also closed 150 of its namesake stores,

Target said in November that it would cut total costs by up to $3 billion in the next three years, as it warned of a slower holiday season. It did not provide details on that plan. The company will report its fourth quarter results on February 28.

Many retail leaders said they anticipate cost-cutting measures for their workforce over the next 12 months, such as hiring temporary workers instead of full-time employees, according to a December survey of 300 retail executives by consulting firm AlixPartners. According to. Thirty-seven percent said they expect slower growth or promotions and 28% said they expect profit cuts at their companies in the coming year.

19% of those surveyed said their companies had layoffs in the last 12 months and 19% said they expected layoffs in the next 12 months.

Mary Driscoll, an analyst covering beauty, luxury and fashion for retail advisory firm Coresight Research, said she expects companies to look closely at other line items, such as free shipping and returns, as well as digital marketing spend.

As interest rates rise, she said retailers “may find operating religion.”

“Retailers are looking at their businesses and saying not every sale is worth it,” she said. “The fact that money has a real cost is changing the way companies are looking at their business.”

Yet some factors still work in retailers’ favor, she said. tight labor markets can give consumers the confidence to spend, While inflation remains hot. As they go out again, people are wearing clothes and buying fragrances, which may be a factor. January retail sales lifted With more spending in bars and restaurants.

She said earnings season will bring surprises and show which companies can navigate the helicopter waters. NikeFor example, broaden your perspective after topping Wall Street’s expectations in December.

“A lot of it is going to depend on the strength of their consumer and their brand,” Driscoll said. “There’s strength.”