LDN - Business

'Stubborn' food inflation leaves U.S. shoppers with slim appetite for other goods

[February 23, 2023] By Siddharth Cavale

(Reuters) - As American shoppers stomach soaring food prices, they are cutting back on purchases of other goods, such as toys, clothing and housewares, in a challenging trend for retailers.

Commentary this week from executives at Walmart and other retailers shows how Americans are shifting their shopping habits and hunting for bargains in the face of the highest inflation in a generation.

At Walmart, the world's biggest retailer by revenue, Americans are still spending but are more "choiceful, discerning, thoughtful" about what they buy, its global Chief Executive Officer Doug McMillon told analysts.

Higher prices on food led to soft sales of electronics, toys, home and apparel in the most recent quarter at Walmart. McMillon said he believed inflation on dry groceries and items made for immediate consumption would remain high "for a while".

The average cost for food consumed at home climbed 11.3% in January from a year earlier, Labor Department data showed.

That was nearly 5 percentage points above the overall rate of inflation, among the widest gaps since the 1970s. Food cost increases have outstripped broader inflation for nearly a year. "Food inflation has been the most stubborn of all the categories," Walmart's U.S. CEO John Furner said.

Coresight Research predicts annual grocery retail sales will grow by around $500 billion between 2022 and 2030.

Sharp sales declines in categories other than food are forcing retailers like Target to slash prices on everything from toys to electronics.

"If I were a (U.S. retail) CFO right now, I'd probably have to be talking about the most conservative guide possible," said David Wagner, portfolio manager at Aptus Capital Advisors. The firm holds about $7 million in Walmart shares and recently sold its investment in Target.

HOME IMPROVEMENT CRUNCH

Walmart can withstand the challenge more than other retailers, investors said, as groceries make up a bigger share of its sales.

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Shoppers crowd a supermarket to buy food ahead of the Thanksgiving holiday in Chicago, Illinois, U.S. November 22, 2022. REUTERS/Jim Vondruska

While groceries comprise 56% of Walmart sales, they make up about 20% of sales at Target, which depends more on home furnishings, apparel and beauty.

Sales for last fiscal year at Target, which reports on Feb. 28, are expected to rise 2.7%, according to estimates, well below the 6.7% rise that Walmart reported.

"There is still risk in the market ... but for Walmart it is able to manage that risk and that's why we own it. We are overweight on it compared to, say, Target," said Eric McNew, portfolio manager at Summit Global Investments, which no longer holds Target shares.

Home goods retailers are under pressure, with sales of home goods and home improvement merchandise, including gardening products, in 2022 making up just 11% of total retail sales, down from 15% in 2017, according to Coresight, which pulls data from the U.S. Census Bureau.

At Home Depot, shoppers spent less on goods such as soft flooring and roofing in the most recent quarter, its Chief Executive Officer Edward Decker said.

At off-price clothing and homeware retailer TJX, sales at its HomeGoods unit slid 11% in 2022.

"We're still trying to figure out the home trend nationally," TJX CEO Ernie Herrman told analysts on Wednesday. Lowe's Cos Inc, which reports on March 1, could feel a bigger pinch than larger rival Home Depot, as Lowe's tends to draw more do-it-yourself shoppers than inflation-resistant professional builders and contractors.

In clothing sales, Wall Street will learn more about inflation's impact in March, when specialty retailers including Kohl's, Nordstrom and Victoria's Secret & Co report quarterly results.

"The macro outlook is on rocky ground and I think some of the data suggests that we may not have seen the last of this ... with recession looming on the horizon," said McNew.

(Reporting by Siddharth Cavale, Kate Masters in New York and Aishwarya Venugupal, Uday Sampath in Bengaluru; Editing by Sonali Paul)

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