Compilation of Target, Walmart, Lowe’s and Home Depot stores.
How well is the American consumer holding up against sky-high inflation? It depends on whom you ask.
Four major retailers — Walmart, Target, Home Depot and Lowe’s — reported quarterly financial results this week, and they each offered a different perspective on where and how people are spending their money.
Walmart said some of its more price-sensitive customers are beginning to trade down to private-label brands, while Home Depot emphasized the resiliency among its customer base, a sizable percentage of which are professional home builders and contractors.
The reports came after Amazon in late April flashed warning signs for the retail industry when it booked the slowest revenue growth for any quarter since the dot-com bust in 2001 and offered up a bleak forecast.
Still, expectations on Wall Street were higher this week for both Walmart and Target. Analysts and investors didn’t anticipate that the two big-box retailers would take such a massive hit to their profits in the latest period as supply chain costs weighed on sales and unwanted inventory, such as TVs and kitchen appliances, piled up. Walmart closed Tuesday down 11.4%, marking its worst day since October 1987. On Wednesday, Walmart fell another 6% in afternoon trading, while Target was also on pace to have its worst day in 35 years.
Home Depot and Lowe’s, though, have seen more strength among shoppers in recent weeks.
“Our customers are resilient. We are not seeing the sensitivity to that level of inflation that we would have initially expected,” Home Depot CEO Ted Decker said Tuesday on the company’s earnings call. (Shares of both home improvement chains were down more than 5% in Wednesday afternoon trading amid a broader market selloff.)
The mixed commentary from these retailers is in large part due to the fact that Americans are experiencing economic volatility differently, dependent upon their income levels. Companies and consumers are in an uncharted transition period following months of Covid-related lockdown measures that prompted purchases of canned goods, toilet paper and Peloton Bikes to soar. Multiple rounds of stimulus dollars fueled spending on new sneakers and electronics.
But as that money dries up, retailers must navigate their new normal. That includes inflation at 40-year highs, Russia’s war in Ukraine and a still-crippled global supply chain.
“While we’ve experienced high levels of inflation in our international markets over the years, U.S. inflation being this high and moving so quickly, both in food and general merchandise, is unusual,” Walmart Chief Executive Officer Doug McMillon said Tuesday on an earnings conference call.
The results this week could foreshadow trouble for a number of retailers, including Macy’s, Kohl’s, Nordstrom and Gap, which have yet to report results for the first quarter of 2022. These companies that rely on consumers coming inside their stores to splurge on new clothes or shoes could be particularly pressured, as Walmart hinted that shoppers were beginning to pull back on discretionary items to budget more money toward groceries.
At the same time, retailers are citing an uptick in demand for items such as luggage, dresses and makeup as more Americans plan vacations and attend weddings. But the concern is that consumers will be forced to make trade-offs, somewhere, in order to afford these things. Or they’ll seek out discounted goods at shops such as TJ Maxx.
Here’s what Walmart, Target, Home Depot and Lowe’s are telling us about the state of the American consumer.
Walmart is seeing a mixed picture, shaped by consumers’ household income and how they feel about the future. But in the most recent quarter, the nation’s largest retailer said shoppers are showing they are mindful of the budget.
Customers walked out of stores and left the retailer’s website with fewer purchased items. More of them skipped over new clothing and other general merchandise as they saw prices rise on gas and groceries. Some traded down to cheaper brands or smaller items, including half-gallons of milk and the store brand of lunch meat instead of a pricier brand-name one, Chief Financial Officer Brett Biggs told CNBC.
On the other hand, he said, some customers have sprung for new patio furniture or eagerly chased the flashy new gaming console, he said.
“If you look at the demographics of the U.S. and lay our customer map on top of it, we’d be really close to the same thing,” Biggs said. “And so you’ve got some people who are going to feel more pressure than others and I think that’s what we’re seeing.”
Target said it is seeing a resilient consumer who have new priorities as the pandemic becomes more of an afterthought.
“They’re shifting from buying TVs to buying luggage,” Chief Executive Officer Brian Cornell said in an interview on CNBC’s “Squawk Box.” He added later, “they’re still shopping, but they started to spend dollars differently.”
That change showed up with purchases in the fiscal first quarter, he said. Customers bought decor and gifts for Easter and Mother’s Day celebrations. They threw, and attended, larger children’s birthday parties – leading to a jump in toy sales. They also bought fewer items like bicycles and small kitchen appliances as they booked flights and planned trips.
Cornell pointed to the high spending levels that Target went up against in the year-ago first quarter, as Americans got money from stimulus checks and had fewer places to spend it.
Comparable sales still grew, despite that challenging comparison, he noted. Plus, traffic at Target’s store and website traffic rose nearly 4% year over year. Sales growth numbers, however, would include the effects of inflation which is making everything from freight costs to groceries pricier.
Target last quarter also had a higher level of markdowns, a staple of the retail industry that more or less disappeared during the pandemic as shoppers had a big appetite to buy and retailers had less merchandise to put on shelves.
The home improvement retailer told investors on Tuesday that it wasn’t seeing any differences in consumer behavior yet.
Home Depot’s average ticket climbed 11.4% in the quarter, fueled largely by inflation. But executives also said that consumers are trading up, not trading down. For example, consumers are switching from gas-powered lawn mowers to more expensive battery-powered options, according to Home Depot’s Vice President of Merchandising Jeff Kinnaird.
This behavior likely is due to the fact that the overwhelming majority of Home Depot customers are homeowners, who have seen their home equity values soar in the last two years. CFO Richard McPhail said on the call that more than 90% of its do-it-yourself customers own their homes, while basically all of its sales to contractors are on behalf of a homeowner.
McPhail also said that roughly 93% of its customers with mortgages have fixed rates. As interest rates and housing prices rise, consumers who consider moving are opting instead to stay in their current homes and remodel them instead.
Lowe’s echoed similar sentiments during its conference call on Wednesday. CEO Marvin Ellison said home price appreciation, the aging home stock and the ongoing housing shortage are key economic drivers of Lowe’s business.
“It’s one of the reasons why I think home improvement is a unique retail sector and can have this macro environment where there are a lot of questions about the health of the consumer,” he told analysts.
Consumers working on DIY projects account for about three quarters of Lowe’s sales, which is a higher proportion than rival Home Depot. So far, the company isn’t seeing any material trade down from those consumers yet.
However, consumers are starting to feel the pinch from rising energy prices. Ellison told CNBC that Lowe’s customers are trading up to battery-powered landscaping tools and lawnmowers and more fuel-efficient laundry machines.
“Do I think it has something to do with fuel prices? The answer is absolutely,” he said.
Lowe’s did fall short of Wall Street’s expectations for its quarterly sales, but executives chalked up the retailer’s disappointing performance to weather.
Disney is raising prices, but this time, don’t blame inflation
Another major American company is raising prices again, but this time, don’t blame inflation.
Disney is increasing the price on its streaming products and signaled that a price hike could be in the works at its theme parks as well. On Wednesday, the company said the price of Disney+ without ads is jumping $3 per month to $10.99 starting Dec. 8. Hulu with ads will increase by $1 per month to $7.99, and Hulu without ads will jump $2 per month to $14.99.
Then on Thursday, Disney Chief Executive Officer Bob Chapek indicated to CNBC’s Julia Boorstin that a price increase will likely happen at theme parks as long as people keep coming in droves.
“We read demand. We have no plans right now in terms of what we’re going to do, but we operate with a surgical knife here,” Chapek said. “It’s all up to the consumer. If consumer demand keeps up, we’ll act accordingly. If we see a softening, which we don’t think we’re going to see, then we can act accordingly as well.”
Instead of blaming the rising cost of materials, labor and gas, Disney is rationalizing the increases based on the consistency of the popularity of its products. Disney said Wednesday that Disney+ added 15 million new subscribers last quarter, blowing out expectations. It also said it expects further growth for core Disney+ (excluding India’s Disney+ Hotstar) next quarter beyond the 6 million it added in its fiscal third quarter.
Raising prices on the back of strong demand isn’t new for Disney. The price of theme park tickets has climbed for decades. During its most recent quarter, the company posted a 70% revenue increase in its parks, experiences and products division, rising to close to $7.4 billion. Per capita spending at domestic parks rose 10% and is up more than 40% compared with fiscal 2019.
Handout | Getty Images Entertainment | Getty Images
Disney strategically caps attendance at its parks, an effort that was borne out of the attempts to avoid crowding during the Covid pandemic. The move is a way to improve the customer experience. Additionally, the company has added Genie+ and Lightning Lane products, which curate guest experience and allow parkgoers to bypass lines for major attractions.
Beyond the parks, Disney annually asks cable TV providers to pay aggressive price hikes for ESPN because it knows there’s strong demand for its stable of live sports rights.
Disney+ first launched in November 2019 at $6.99 per month. About three years later, the price of the ad-free product will have risen 57%. The service now has more than 152 million customers.
Chapek has experienced his share of bumps in the road since taking over for Bob Iger as Disney CEO. But one thing hasn’t changed: consumers still seem to enjoy what Disney has to offer.
Correction: During its most recent quarter, the company posted a 70% revenue increase in its parks, experiences and products division, rising to close to $7.4 billion. An earlier version misstated the percentage and mischaracterized the dollar figure.
WATCH: CNBC’s full interview with Disney CEO Bob Chapek
Disney streaming subscriber growth blows past estimates, as company beats on top and bottom line
A performer dressed as Mickey Mouse entertains guests during the reopening of the Disneyland theme park in Anaheim, California, U.S., on Friday, April 30, 2021.
Bloomberg | Bloomberg | Getty Images
If Disney+’s subscriber growth is any indication, the rumors that the global streaming market is nearing saturation have been proven untrue.
On Wednesday, the Walt Disney Company reported that total Disney+ subscriptions rose to 152.1 million during the fiscal third quarter, higher than the 147 million analysts had forecast, according to StreetAccount.
At the end of the fiscal third quarter, Hulu had 46.2 million subscribers and ESPN+ had 22.8 million. Combined, Hulu, ESPN+ and Disney+ have over 221 million streaming subscribers. Netflix, long the leader in the streaming space, had 220 million subscribers, according to the most recent tally.
Disney shares rose more than 6% after the closing bell.
The streaming space has been in a state of upheaval in recent weeks, as Netflix disclosed another drop in subscribers and Warner Bros. Discovery announced a shift in content strategy. While Netflix expects subscriber growth to rebound, uncertainty has left analysts and investors wondering what the future holds for the wider industry.
Also Wednesday, the company unveiled a new pricing structure that incorporates an advertising-supported Disney+ as part of an effort to make its streaming business profitable.
During the fiscal third quarter Disney+, Hulu and ESPN+ combined to lose $1.1 billion, reflecting the higher cost of content on the services. Disney’s average revenue per user for Disney+ also decreased by 5% in the quarter in the U.S. and Canada due to more customers taking cheaper multiproduct offerings.
Starting Dec. 8 in the U.S., Disney+ with commercials will be $7.99 per month — currently the price of Disney+ without ads. The price of ad-free Disney+ will rise 38% to $10.99 — a $3 per month increase.
In addition, Disney lowered its 2024 forecast for Disney+ to 215 million to 245 million subscribers, down 15 million on both the low end and high end of the company’s previous guidance.
Disney had previously set its Disney+ guidance in December 2020 at 230 million to 260 million by the end of fiscal 2024. The company reaffirmed its expectation that Disney+ will become profitable by the end of its fiscal 2024 year.
Overall, Disney posted better-than-expected earnings on both the top and bottom line, bolstered by increased spending at its domestic theme parks.
Here are the results:
- Earnings per share: $1.09 per share vs. 96 cents expected, according to a Refinitiv survey of analysts
- Revenue: $21.5 billions vs. $20.96 billion expected, according to Refinitiv
- Disney+ total subscriptions: 152.1 million vs 147.76 million expected, according to StreetAccount
Big quarter for parks
Disney’s parks, experiences and products division saw revenue increase 72% to $7.4 billion during the quarter, up from $4.3 billion during the same period last year. The company said it saw increases in attendance, occupied room nights and cruise ship sailings.
It also touted that its new Genie+ and Lightning Lane products helped boost average per capita ticket revenue during the quarter. These new digital features were introduced to curate guest experience and allow parkgoers to bypass lines for major attractions.
The company said it has been able to bring back in-park experiences such as character meet-and-greets, theatrical performances and nighttime events at Disneyland, which has allowed it to increase capacity at its parks, CEO Bob Chapek said during the company’s earnings call Wednesday. Disney has placed caps on attendance since it reopened after the initial round of pandemic closures in early 2020 and instituted a new online reservation system to control crowds.
“As it relates to demand, we have not yet seen demand abate at all and we still have many days when people cannot get reservations,” Christine McCarthy, Disney’s chief financial officer, said during the company’s earnings call. “So, we’re still seeing demand in excess of the reservations that we are making available for our guests.”
Per capita spending at domestic parks increased 10% during the most recent quarter, compared to the same quarter last year and is more than 40% higher than fiscal 2019, the company said. Occupancy at domestic hotels in the third quarter was 90%.
Chapek pointed to EPCOT’s new Guardians of the Galaxy Cosmic Rewind, the launch of the Disney Wish and the opening of Avenges Campus in Paris Disneyland as enhanced offerings for guests that have driven traffic and revenue to this division.
McCarthy noted that international visitors to domestic parks have continued to be slow to return. Traditionally, those parkgoers account for around 17% to 20% of total guests.
“We expect international visitation when its fully back to actually be additive to margins, because those guests tend to stay longer at the parks and they spend more money when they’re there, as well,” she said.
Disclosure: Comcast is the parent company of NBCUniversal and CNBC. Comcast owns a stake in Hulu.
Serena Williams announces her retirement from tennis
Tennis legend Serena Williams announced her retirement in a Vogue article published Tuesday.
“I have never liked the word ‘retirement,'” Williams wrote. “Maybe the best word to describe what I’m up to is ‘evolution.’ I’m here to tell you that I’m evolving away from tennis, toward other things that are important to me.”
Williams, who turns 41 next month, has 73 career singles titles, 23 career doubles titles and over $94 million in career winnings.
Williams is widely hailed as one of the greatest athletes of all time. In her Vogue piece, she noted that some of her detractors point out that she hasn’t won the most Grand Slam titles in women’s tennis history, however.
“There are people who say I’m not the GOAT because I didn’t pass Margaret Court’s record of 24 grand slam titles, which she achieved before the ‘open era’ that began in 1968,” Williams wrote. “I’d be lying if I said I didn’t want that record.”
She said she will retire after the U.S. Open, which will run from late August into September. A victory there would tie her with Court’s Grand Slam record.
“I don’t know if I will be ready to win New York. But I’m going to try,” Williams wrote about the tournament, which is played in Queens.
She has counted sponsorships from companies including Nike, Audemars Piguet, Away, Beats, Bumble, Gatorade, Gucci, Lincoln, Michelob, Nintendo, Wilson Sporting Goods, and Procter and Gamble.
“I never wanted to have to choose between tennis and a family. I don’t think it’s fair,” Williams wrote. “If I were a guy, I wouldn’t be writing this because I’d be out there playing and winning while my wife was doing the physical labor of expanding our family.”
Williams focused on her family in the announcement, writing that her nearly five-year-old daughter wants to be an older sister. Williams is married to Reddit founder Alexis Ohanian.
“I have to focus on being a mom, my spiritual goals and finally discovering a different, but just exciting Serena. I’m gonna relish these next few weeks,” Williams wrote in an Instagram post Tuesday.
Professionally, she looks to expand Serena Ventures, a small investment firm of six people that was one of the first investors in MasterClass. Her firm raised $111 million in outside financing this year.
Williams wrote that only 2% of venture capital goes to women and that “in order for us to change that, more people who look like me need to be in that position, giving money back to themselves.”
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