Retailers Lay Out a Downbeat Outlook as Inflation Squeezes Low-Income Shoppers

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As many of America’s best-known retailers reported better-than-expected quarterly earnings this week, buoyed by shoppers who continued to spend through stubbornly high inflation, they all seemed to arrive at the same conclusion: Conditions are about to get much, much worse.

Consumer spending, which accounts for about two-thirds of the U.S. economy, is a closely watched measure, and the performance of retailers is critical to that equation. This week, retail executives presented investors and analysts with downbeat outlooks for the first quarter and the year ahead, forecasting that sales growth, if any, will be much smaller than in years past.

When describing their forecasts, several retail executives said on calls with analysts that they expected “softness” and “headwinds” and were planning “prudently” and “conservatively.” Many of their assessments are being shaped by the spending patterns they’re seeing from low-income shoppers, who, squeezed by inflation, are being judicious about what they’re spending money on, and where they’re doing it.

Ross Stores, a discount retailer, expects sales to be flat for its fiscal year, which will end in late January, after posting a 1 percent increase in same-store sales for the fourth quarter. During that period in 2021, it recorded a 9 percent increase.

“Elevated inflation continues to impact our low- to moderate-income customer,” Adam M. Orvos, chief financial officer at Ross Stores, said Wednesday on a call with analysts.

Inflation F.A.Q.

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.

What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.

Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

Kohl’s expects net sales to decline 2 to 4 percent for its full year ahead. On Wednesday, the company’s new chief executive, Tom Kingsbury, told analysts that he wanted to be realistic in setting expectations.

Macy’s said its comparable sales would be down 2 to 4 percent in the coming year, with its chief executive, Jeff Gennette, noting that “discretionary spending will be under pressure across income tiers.”

Best Buy expects same-store sales to fall 3 to 6 percent in its full year, which ends in late January. Its chief financial officer, Matt Bilunas, said first-quarter sales would be most affected by pullback in consumer spending.

“What’s spooking investors and what is causing concern is that all of the outlooks are very, very soft, and people are really talking down the prospects for the coming year,” said Neil Saunders, managing director at the retail consultancy GlobalData. “They’re talking about sales declines, further crunch in profits, and that really sets the tone that 2023 is going to be a very muted year for retail.”

That sentiment was echoed by retailers that cater to lower-income shoppers.

Dollar Tree, which also owns Family Dollar, expects its gross and operating margins will narrow in the first half of this year but bounce back in the second half. It still expects comparable sales to increase, just in the low- to mid-single digits.

The furniture retailer Big Lots had same-store sales fall 13 percent in the fourth quarter and said it expected them to be down by the low- to mid-teens in the first quarter.

“The lower-household-income customers are pinched,” the company’s chief executive, Bruce K. Thorn, said. “They’re going through a tough time right now.”

In a push for profitability in 2023, retailers are trying to narrow their focus. Nordstrom, which reported a drop in margins and sales volume during the holiday season, said it would shut down its operation in Canada, which counts 13 stores and about 2,500 employees. When it started opening stores there about a decade ago, the department-store chain saw Canada as a first step to expanding internationally. On Thursday, its chief executive, Erik Nordstrom, said that “despite our best efforts, we do not see a realistic path to profitability for the Canadian business.”

To be sure, while there are worries about the outlook, the data so far don’t necessarily suggest that the economy is in or hurtling toward a downturn. And a conservative outlook isn’t an unusual tactic for retailers, said Simeon Siegel, a managing director at BMO Capital Markets.

“Generally speaking, if a management team wants to under-promise and over-deliver, they need to set a low bar at the beginning,” Mr. Siegel said. “And that’s what we’re dealing with.”

And some of the obstacles that retailers have faced over the past few years are finally clearing up. Freight costs are coming down and supply chains are easing, which would help lower operating costs.

Despite inflation pressuring its core customers’ wallets, Burlington, an off-price retailer, told investors that it expected sales for its fiscal year, which will end in February, to increase 12 to 14 percent, above Wall Street’s expectations. Other retailers’ financial woes are a boon for Burlington, according to its chief executive, Michael B. O’Sullivan.

“For us, the biggest source of new store locations comes from other retailers closing stores,” Mr. O’Sullivan said on a call with analysts. “So many of our most productive locations were formerly Circuit City or Toys ‘R’ Us or Sports Authority or Linens & Things. In other words, if there’s an increase in retail bankruptcies, then that’s going to drive real estate opportunities and new store opening opportunities for us.”

Burlington, which has about 840 stores, is planning to open up to 80 more this year.