Target, Walmart earnings reports offer downbeat signals

Some people read tea leaves; we prefer earnings reports.

We don’t need a fortune-teller to state the obvious: Consumers have been capital-G gloomy for quite some time now. But that hasn’t always translated to a spending pullback or a downbeat economy: Executives and economists alike can’t stop calling the economy resilient, like the economy is a plucky small town girl trying her best in the big city in spite of it all.

And in some earnings calls in late April and early May, CFOs and executives adoapted that same gutsy ethos, arguing that rising gas prices haven’t rattled consumers as much as one might expect. That was before the Labor Department reported the producer price index climbed 1.4% in April, the largest monthly gain in over four years, according to the Associated Press.

As more retailers report Q1 earnings, we’re getting a more comprehensive snapshot of the consumer. The picture doesn’t look as rosy as other recent earnings reports made it out to be—but we’re not in full-fledged panic mode either.

Better days? At Target, which had previously reported 13 consecutive quarters of tepid or dipping sales, it seemed like happy days may be ahead: The company reported its best quarterly sales gain since 2022, as comparable sales climbed 5.6% in the quarter, per the Wall Street Journal. But consider that Target had a drop in sales in last year’s Q1.

Even so, the company cautioned that results might not be as solid for the current quarter, with CFO Jim Lee whipping out the whole “resilience” argument.

“We believe this year’s higher tax refunds were a source of upside to consumer spending in Q1, and that benefit will be fading over the rest of the year,” Lee said on the company’s May 20 earnings call. “While consumers have proven to be resilient so far, sentiment has been declining recently and we’re keeping a close eye on their spending behavior.”

Outside observers were similarly reluctant to interpret one good quarter from Target as an all-clear for the company.

“As much as we applaud Target’s return to growth, we caution that one quarter of solid performance does not represent a permanent return to the sunlit uplands,” Neil Saunders, managing director of GlobalData, told CFO Brew via email. “Target will have to prove itself across many more quarters—during some of which the prior year comparatives are less favorable.”

Pricing power. Over at Walmart, the company delivered a financial outlook for the current quarter that missed analysts’ expectations, as the big-box retailer said it might have to raise prices to offset rising fuel costs.

While Walmart reported largely positive Q1 earnings, with revenue rising 7.3% to $177.8 billion, the company took a significant hit due to fuel prices, saying it absorbed $175 million in fuel costs for the quarter.

“These are real impacts to cost of goods sold for us and our suppliers,” CFO John David Rainey said on the company’s May 21 earnings call. “If the current elevated cost environment persists, we’d expect somewhat higher retail price inflation in Q2 and the second half of the year.”

The retailer also offered a glimpse into the current state of the much-discussed bifurcated consumer landscape.

When asked during Walmart’s earnings call how consumer behavior has changed amid higher fuel prices, Rainey said, “increasingly, it depends upon which consumer you’re talking about…We see with our customers that the high income customer is spending with confidence into many categories, while the lower income consumer is more budget conscious and perhaps navigating financial distress,” he continued.

The tea leaves/earnings reports are signaling some headaches ahead.