Retail Q3 Earnings: 2023’s Resilient Consumer Was a Surprise, but Rate Pressure, Jobs Picture Could Dim Holiday Lights

As Q3 retail earnings arrive, so do lower inflation numbers. But interest rates are still high. How will that affect consumers as holiday shopping begins?
4 min read
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Key Takeaways

  • Welcome to the post-pandemic shopping era—savings rates are lower, consumer debt is higher, and student loan payments are back

  • Discretionary spending moved downward by the end of Q3—what that could mean for holiday results 

  • What to listen for during top retailers’ earnings calls

As retailers face a consumer economy that’s starting to look a lot more like the pre-pandemic era, the question is whether stores will further trim expectations now that it’s starting to look a lot like Christmas.

Already this morning, Q3 retail earnings season began in earnest with a one-two punch of fresh data from stores, industry watchers, and the government.

Before today’s open, Home Depot (HD) reported above-expectations earnings, but sales were down 3% from year-ago levels. HD’s CEO Edward Decker told CNBC that its latest results reflect “a period of moderation in home improvement, likely due to average U.S. home-equity-loan rates that are hovering near 8% despite a Federal Reserve rate hike pause that began in late July. Home equity loans finance many consumer building and renovation projects.

Hours later, October’s Consumer Price Index (CPI) came in flat month over month and up only 0.2% excluding food and energy, known as core CPI. Analysts expected a 0.1% monthly rise in CPI and 0.3% in core CPI. Will slowing inflation deliver much action at the register or the pump, where gas prices have already been falling? Retail executives may have more to say about this.

Target (TGT) reports tomorrow and Walmart (WMT) and Macy’s (M) on Thursday, leading major retail names reporting throughout the month. For many retail chains, top- and bottom-line results are expected to be lower for the latest completed quarter, setting up the potential for a more modest holiday spending season.

And October retail sales numbers due tomorrow could be one of the month’s most important numbers, as some analysts expect lower results against September’s 0.7% increase.

The consumer sprint starts to slow

According to research firm CFRA, very few economists or analysts “expected U.S. consumers to be as resilient as they have been in 2023,” amid continued Federal Reserve rate hikes and months of speculation that a recession could be on the way. Though food and energy prices have retreated from 2022 highs, other consumer spending threats have surfaced. Record pandemic household savings have shrunk, and Q3 credit card balances have now hit the highest level since 1999, according to numbers released this past week from the Federal Reserve Bank of New York.

And just after the close of Q3, one of the biggest future consumer spending wild cards began—the return to federal student loan payments on October 1 after a three-year COVID-19 break. More than 40 million Americans have student loans to pay, and how they handle spending during retailers’ all-important fourth quarter could resonate for stores because most book the lion’s share of their annual profits the holiday season.

Setup for Santa

The National Retail Federation’s (NRF) latest projections on holiday sales represent “a whole new set of dynamics” based on the issues above—and perhaps a few that go beyond the pocketbook.

“We are continuing to see a disconnect between solid consumer spending and weak consumer confidence. Recent surveys show that consumers are concerned about the outlook for income and that business and job market conditions are slowed by higher interest rates elevating borrowing costs, ongoing inflation and political stress,” said the NRF, still holding to an earlier projection that overall 2023 annual retail sales will rise 4% over 2022 with online and non-store sales up between 7% and 9%.

Such projections could have most retailers talking not so much about Q3 as Q4, though Walmart’s results on Thursday could set the conversation for stores that will report afterward. Analysts’ consensus have the nation’s largest discount retailer and grocery chain’s latest quarterly earnings up a little less than 1% with revenues up around 4.2% from the year-ago quarter. 

TAPPING THE BRAKE. Though the last Fed rate hike happened in late July, key consumer rates continued to move upward through Q3, perhaps thinning lines at checkouts and in online carts. The Dow Jones U.S. Retail Index ($DJUSRT—candles), the S&P 500 Consumer Discretionary Sector Index ($SP500#25—pink line), and the S&P 500 Consumer Staples Sector Index ($SP500#30—blue line) pulled up a bit by the end of the quarter, but not by much. Data source: S&P Dow Jones Indices. Chart source: thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

Next up

The news won’t stop with Walmart. Thursday will deliver scheduled results from other national chains in a variety of categories, including Ross Stores (ROST), Shoe Carnival (SCVL), Bath & Body Works (BBWI), Williams-Sonoma (WSM), and Gap (GPS).

Friday will deliver BJ’s Wholesale Club Holdings (BJ), and then it’s on to November 21, when Lowe’s (LOW), Nordstrom (JWN), Dick’s Sporting Goods (DKS), Best Buy (BBY), and Kohl’s (KSS) all report. LOW will provide additional narrative on where the home improvement industry is headed.

Where’s Costco (COST)? It’s scheduled to report December 14.

What to listen for during earnings calls

  • How were margins and inventories in Q3, and what are they likely to look like in Q4, especially with some shoppers keeping a closer eye on their wallets?
  • Consumers spent big on travel and experiences this year and last—do retailers see a change in spending choices?
  • Jobs and the Fed: How do major retailers see job prospects for their customers, their teams, and where might rates go and when?
  • Credit card balances and defaults are growing. Do retailers anticipate consumer credit problems that could affect sales?
  • In 2023, Bed Bath & Beyond shut its physical stores—what did that mean for the home goods category as a whole? Who picked up that business?
  • Have supply chain bottlenecks cleared up versus three years ago?

Key Takeaways

  • Welcome to the post-pandemic shopping era—savings rates are lower, consumer debt is higher, and student loan payments are back

  • Discretionary spending moved downward by the end of Q3—what that could mean for holiday results 

  • What to listen for during top retailers’ earnings calls

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