Walmart: Grocery Inflation, General Merchandise Sales Down
3Q 2023 results from Walmart's U.S. this week revealed that while grocery inflation is coming down, it has yet to lead to growth in general merchandise. We estimate that Walmart’s general merchandise sales decreased by high-single-digit rate (excluding contribution from its third-party marketplace business), which matched Target’s results (which we analyze in greater detail below). CEO Doug McMillon stated, “The pockets of disinflation we are seeing are helping, but we'd like to see more faster, especially in the dry grocery and consumables categories...We may be managing a period of deflation in the months to come. And while that would put more unit pressure on us, we welcome it because it's better for our customers.” (McMillon's comments will send shivers down the spines of all Walmart suppliers and competitors but put smiles on the faces of the Federal Reserve.)
McMillon added, “If the food prices come down in dry grocery and consumables and we start seeing deflation in those categories, that will free up dollars to be spent in general merchandise. And with the rollback positioning and some of the prices we're hitting, it makes sense that people would be able to shift back to general merchandise as they shop the box or the app. The great thing about our position is we don't really care. Like they can buy whatever they want to buy. We're positioned for food. We're positioned with fresh. We're positioned with apparel and with hardlines and with holiday season with the categories like toys. We've got a good value regardless of which category and department you look at and we'll play the shift as it happens. And if we end up where both sides, food and GM, are deflated some that we just need to focus on driving even more units to your point.
But if they've got dollars to spend, they'll spend them. And we're there for them.” In another part of its update call, McMillon noted, “We think we may see dry grocery and consumables start to deflate in the coming weeks and months. And as we look ahead to next year, we could find ourselves in Walmart U.S. with a deflationary environment.”
When describing the pace of the business, CFO John David Rainey said, “We see our customers showing ongoing discretion and making trade-offs to be able to afford the things they want, given the sustained high cost of the things they need. Recently, we've experienced a higher degree of variability and weekly performance in between holiday events in the U.S., including seeing a softening in the back half of October that was off trend to the rest of the quarter. Sales during November have turned higher as unseasonal weather abated and we kicked off holiday events. So sales have been somewhat uneven, and this gives us reason to think slightly more cautiously about the consumer versus 90 days ago. We still expect sales growth to moderate in Q4 versus prior quarters as grocery inflation further normalizes towards historic levels.” Our data shows similar trend for store visits (below).
Walmart’s e-commerce revenue grew +24% driven by curbside, third-party sellers, and Walmart Connect. (We estimate that Amazon grew its U.S. gross merchandise volume (GMV) at a high-single-digit rate, or by +$10B during the quarter; Walmart grew its e-commerce by an estimated +$3-$4B.) On Walmart’s third-party business, Walmart U.S. CEO John Furner shared, “[We're] really pleased with the progress the [marketplace] team has made...Our assortment has grown significantly...We had our first event last week and getting into our holiday season. We have a long way to go from here until the end of the holidays, but [we're] really pleased with the results in marketplace...And the marketplace over time, of course, will be a key driver to some of the other businesses like advertising. As more sellers find customers on the Walmart marketplace, they'll want to use services like our fulfillment services and our advertising business.”
Target: Q3 2023 Profitability Stronger Than Anticipated
Target’s Q3 2023 profitability came in much stronger than planned. The sales trend remains subdued (comparable-store sales decreased -5%) but they are stable and in a much better place than last spring. We attribute the sales stability to Target’s amplification of the “pay less” portion of its brand message. This includes more entry-level price points (as a percentage of the mix and included in its “circulars”), better in-stocks, better stability in the employee base, and more enhancements to Circle rewards. We’d also expect that a choppy first half of 2023 led to a greater focus on the merchandising and a tightening up on execution.
In terms of the quarter’s drivers, we’d highlight stability in merchandise mix, an improvement in the conversion rate, and a substantial improvement in gross margins (reflecting strong sell-throughs, and an increase in inventory turns). In total, this sets up Target well to outperform its guidance calling for a mid-single-digit decline in comparable-store sales for Q4 2023. Beauty, a category that we called out in last week's holiday outlook, was the strongest category from a sales perspective this quarter, growing +9% year-over-year and now stands 1.6x higher than 2019 (up from 1.5x in Q2 2023). The growth was largely the byproduct of unit acceleration with price inflation being less of a contributor. While profitability was far above plan, management was not satisfied with the traffic and unit declines. As such, and as has been the case since June, Target will again be merchandising and advertising low entry price points and value.
In describing the consumer, Target Chief Growth Officer Christina Hennington said, “Consumers are feeling the weight of multiple economic pressures and discretionary retail has borne the brunt of this weight for many quarters now. In addition, consumers are facing newly emerging headwinds, including higher interest rates and the return of student loan payments. In the face of this mental and emotional tug of war, consumers are looking for a respite, which is why we are relentless in our pursuit to provide ease, inspiration, joy, and comprehensive value every day...Our goal this holiday season is to create the perfect combination of incredible value fresh products and a joyful shopping experience as you still the aisles in our stores or on the recently refreshed Target website and app...Over two-thirds of this season's toy assortment priced under $25...[In] holiday decor is even lower than ever before. Nearly two-thirds of the assortment will be priced under $20.” (i.e., Target's strategy for the holiday is to emphasize "pay less".)
Home Depot: Price Sensitivity Headwinds Remain, but Early November Trends Encouraging
For much of the year, the narrative around the home improvement retailers has been that 2023 would be a challenging year due to increased consumer price-sensitivity but that there were several factors that supported increased visitation in the years to come (including aging of the U.S. housing stock and home values/equity that are still ahead of where they were before the start of the pandemic). Home Depot’s Q3 2023 update this past week revealed a continuation of trends we’ve observed throughout the year–namely consumers taking on smaller home improvement projects in lieu of larger projects involving bigger-ticket discretionary purchases–but early November visitation trends offer some hope as we look to next year.
For the quarter, management noted that U.S. comparable-store sales (which includes both in-store and online transactions) declined -3.5% , largely driven by a decline in transactions year-over-year. By month, comps decreased -2.5% in August, -3.8% in September, and negative -4.1% in October. Stripping out digital sales–which increased 5% year-over-year–our data indicates that in-store visits were down almost 10% during the quarter (below), with sequentially weaker visits as the quarter progressed (some of the year-over-year weakness stems from lapping last year’s visits tied to preparation and recovery efforts tied to Hurricane Ian). However, as we've started to move into November, visitation trends have improved.
Looking ahead, management noted that the performance gap between the Pro and consumer was the closest that it had been in some time (our data indicated that weekday and weekend visits–which can serve as proxy for Pro and DIY visits–had a similar rate of decline during the quarter, with weekday visits running slightly ahead of weekend). The company did not provide an outlook for 2024 (although they did commit to full-year expectations calling for a comparable-store sales decline of 3%-4%, helped by seasonal sell-through and prices settling with abating inflation. However, management repeatedly noted that home improvement personal consumption expenditures (PCE) have not reverted back to 2019 levels at present, and we expect this gap to narrow in 2024 via increased home wear-and-tear due to steady work-from-home trends.
Macy’s: Managing Well in a Tough Environment
Macy’s fiscal Q3 2023 results reflected many of the dynamics that we previewed in our holiday outlook, including soft sales but good inventory management and merchandising that reflect disciplined inventory management and strong curation, storytelling, positioning, and service levels. This is evident in the solid +5% increase in average unit retail (AUR) as well as lower markdowns and higher conversion rates. The increase in AUR reflects less markdowns, but also product mix and more stability with affluent consumers compared to non-affluent consumers. (The same dynamic was evident in Dillard's results).
The Macy’s brand delivered a -6.7% comparable-store sales decline; the top performing categories were beauty (especially fragrance and prestige cosmetics), women’s career, and men’s tailored (in other words, back-to-office wear was strong). Comparable-store sales improved +160 basis points from Q2 2023 and the trend versus 2019 also moved higher. Bloomingdale’s was less bad with comps -4.4%, with beauty again leading. Bluemercury comps increased +2.5%.