This week was a busy one for retail earnings reports, giving us an opportunity for heat check on the industry as we look to the back half of the year. In summary, even the biggest and most advantaged retailers are being knocked off-stride from inflationary costs pressures, supply chain and inventory challenges, and substantial shifts in consumer spending. Thus far, home improvement and grocery have been the safest ports during the storm. A higher grocery and essentials mix at 70% for Walmart has given it a leg-up in financial and comparable-store sales performance over Target. Given this environment, Target is increasing its mix in consumables and suppressing its receipts of more discretionary categories. The categories experiencing the greatest declines in consumer spending are consumer electronics, "cozy/comfy" apparel and soft home goods. Additionally, the middle-income consumer appears to have cut back more.
In terms of the business and consumer, Walmart CFO John Rainey shared, "We finished the quarter on a strong note, however, and ahead of our updated 2Q22 guidance provided last month, and the 3Q22 back-to-school season is off to a solid start. Contributing factors to the better performance included strong sales at the end of the month with good flow-through to the bottom line and lower-than-expected supply chain costs…[In] late 2Q22 and early 3Q22, [our] traffic count was a bit stronger than what we've seen [earlier].” Placer.ai data on a Yo3Y basis confirms these trends.
This positive sentiment was matched by Target, with EVP and Chief Growth Officer Christina Hennington stating, "while we still have several weeks of the season left to go, we've been encouraged by early results in both our back-to-school and back-to-college programs” and that Target is leaning into the holidays with the expectation for a robust period of consumer spending and participation. CEO Brian Cornell added, “The one thing that seems to be very consistent is a guest and consumer who says they want to celebrate the holiday seasons. We certainly expect that they are going to be celebrating Halloween this year and actively trick or treating and hosting parties with friends and family. We know they're looking forward to Thanksgiving, and they're going to look forward to celebrating the Christmas holidays. And that comes out each and every week as we survey consumers and talk to our guests. So that gives us great optimism for our ability to perform during these key holiday seasons."
We offer some additional takeaways for Walmart, Sam's Club, and Target below.
Key Walmart Metrics
- Walmart U.S. reported a solid top-line (comparable-sales growth of +6.5%) and reasonable earnings given its high inventory position. Grocery comparable-store sales of around +12% were the standout as the 2- and 3-yr CAGRs improved and indicated substantial market share gains (something we alluded to in our previous commentary about the shift to value priced grocers). Units per transaction (UPT) in grocery were slightly negative, whereas other grocers are experiencing a meaningful decline in UPT. General merchandise sales were down mid-single-digits, which was better-than-feared. We estimate that the conversion rate improved slightly YoY. Walmart’s inventory position improved QoQ, but at +26% YoY ending Q2, clearance activity will persist into 2H22 (which will weigh on gross margins and profitability), with the focus on electronics, home, and sporting goods.
- Walmart U.S. trailing-twelve-month (TTM) sales per square foot increased $10 QoQ to $579 and are likely to be up mid-single-digits over the next year.
- Walmart U.S. operating profits declined 7% due to clearance activity in general merchandise, adverse product mix changes, a slower pass through of inflation, and the role forward of wage investments implemented last year. That slower pass through is especially in opening price point, private brand, food and consumables items. “Saving people money so that they can live better lives” is Walmart’s consumer proposition, and so, now is its opportunity to demonstrate that.
Key Sam's Club Metrics
- Sam’s Club comparable-store sales (excluding fuel) were an impressive +9.5%, which was driven by comp store-transactions +9.8%. Given inflation, it is surprising that there was a negative comp-store ticket, but that likely reflects substantial clearance activity in consumer electronics. Fresh, grocery, and consumables increased at a low-teens rate. Home & apparel also increased at a low-teens rate reflecting strength in apparel, outdoor living, seasonal, and toys. Consumer electronics was down high-single-digits.
- The strength in home, apparel, and seasonal at Sam’s was attributed to the chain’s higher-income customer profile and the investments they made in higher quality (both make and better-quality brands) that resonated with its members.
- Fuel is also driving membership, trips, and sales with comparable-store gallons up. Higher gas prices are driving trips to Costco, Sam’s, and grocery chains with fueling stations and point programs has been a key retail theme this year, and one more headwind to small format grocers that do not have such an offering.
- Sam’s profitability was down substantially with gross margin rate declining nearly 300 bps on substantial clearance activity in consumer electronics.
- Sam’s membership income and accounts were up +9% to a record total member count and more new members were added than any other quarter in recent years.
- These results suggest that Sam’s is leaning into the opportunity presented by inflation to hold prices and demonstrate extreme value such that it produces meaningful market share gains and new membership signups.
Key Target Metrics
- As was expected, Target reported softer sales results and a significant erosion in profitability. Comparable-store sales increased +2.6% with all the increase driven by transactions. Digital sales increased +9%, led by curbside which gained +15%. As more than 95% of Target’s sales were fulfilled by its stores, an omnichannel view provides the best perspective. That said, brick & mortar comp-sales were up +1.3% due to an increase in transactions. Ticket was flat YoY as higher average unit retail prices (AUR) was offset by fewer units per transaction (compared to Walmart’s UPT, which were down only slightly).
- EVP and Chief Growth Officer Christina Hennington shared, "We've seen our guests shop our own brands in bigger ways and more frequently, knowing they are choosing great quality products with incredible value. We've also seen guest behavior evolve as they focus on optimizing their personal budgets through a heightened response to promotions, as well as greater trip consolidation."
- Hennington also noted that beauty, entertainment, and toys comps increased in high-single-digits, whereas consumer electronics was down a lot. Home and apparel were down low-single-digits. “We're moderating our investment in some...discretionary businesses, and we're leaning very much into food and beverage, Essentials, Beauty, but also select portions of the portfolio and discretionary that have stayed resilient--toys, luggage, seasonal moments, and fashion-forward apparel."
- CEO Brian Cornell also shared that for 2Q22, Target has added traffic by well over 20% since 2019. Placer.ai shows that slightly less than half of that +20% is store traffic into the stores, with the remainder being curbside. Curbside is now around 7% of the total business, versus effectively nothing in 2019.
- Target’s trailing-twelve-month sales per square foot increased $3 QoQ to $436, which is less than Walmart’s increase due to its more discretionary sales mix (a category that is broadly down) compared to Walmart’s 70% sales mix of grocery and consumables. Target’s sales per square foot is very likely to increase by low- to mid-single-digits over the next year. The likelihood stems from the job and income stability of its core consumer, its durable traffic increases (which are building upon the pandemic gains), its ongoing customer engagement with its omnichannel offerings, the store remodels (200 planned during 2022), and store-within-store partnerships (including Ulta, Disney, etc.), and the value (price and content) of its merchandise. As for headwinds, we expect apparel, small appliances, and consumer electronics to be down as categories for the reasons that we shared last week when discussing Personal Consumption Expenditures.
- 24 new locations are planned for 2022, in neighborhoods as diverse as Soho in NYC and Jackson Hole, Wyoming (which echoes our theme of new retail opportunities in smaller markets given migrating consumer wealth).
- As previewed by the company’s June update, profitability was down substantially with CFO Michael Fiddelke stating, “Our second quarter operating margin rate was 1.2%...driven entirely by the decline in our gross margin rate...[An] operating margin rate of just over 1% is well below anything I've seen in my career and something I never expect to see again...Our focus throughout the second quarter was to ensure that we took care of the excess inventory of our network and adjust future receipts to reflect the rapid change in sales trends we've seen so far this year. We accomplished this goal to the benefit of our operations, our team, and our guests."
- We estimate that the "less wanted stuff" represents about 30% of Target’s sales mix and that this inventory was cleared at about 25% off.
- Cornell noted that, “the vast majority of the financial impact of these inventory actions is now behind us. This positions our business to deliver a meaningful improvement in operating margin rates in the fall season...Regarding our guests, we're now positioned to continue driving engagement and growing traffic with a clean, safe, and uncluttered store experience and an assortment that highlights newness and supports growth." Cornell also shared that they are leaning into frequency categories and value in its everyday low price (EDLP) and opening price point (OPP) across every category.