Ahead of retail earnings, here’s what we know about the consumer so far

Broadly speaking, credit card companies like American Express, Visa and MasterCard have described spending trends as “relatively strong,” “relatively stable,” and even “healthy.” Payment firms like PayPal and Block are still seeing strong transaction volumes and payment growth.

Airlines and hotels are expecting a strong travel season ahead, particularly when it comes to international destinations, with Morgan Stanley’s Michael Wilson noting that “one third of consumers prioritize travel over other discretionary purchases and services.”

In fact, a Morgan Stanley survey showed that 60% of U.S. consumers are planning a summer vacation this year — and just about half of those traveling are expecting to spend more than they did last summer.

Priceline parent Booking Holdings told analysts there are no signs consumers are taking shorter vacations or trading down in their hotel choices. Caesars said overall spending is still strong at its Las Vegas casino resorts.

What’s more, cruise lines are seeing record bookings, even as prices have soared. Passengers are also spending freely onboard the ships, despite having to pay significantly more for food and drinks.

Concerts, too, are still hot tickets even at sky-high prices — with Live Nation saying there are “no issues at all on fan demand relative to last summer” and that “global fan demand is stronger than ever.”

But the picture is different when it comes to more discretionary items and everyday purchases as consumers appear more tight-fisted due to economic headwinds like elevated food costs, rising mortgage rates and fewer government rebates.

As online artisan marketplace Etsy put it, “consumer wallets remain squeezed so there’s often little left after paying for food, gas, rent and child care.”

Consumers have been delaying large purchases for their homes amid the economic uncertainty — potentially a key factor to watch when Home Depot and Lowe’s report results this month.

Wayfair, which reported results Thursday, told analysts that the bigger-ticket category “remains weak” and it’s uncertain when demand for home furnishings will improve. Stanley Black & Decker issued a similar warning, saying “muted consumer and DIY demand” has been a result of “some levels of hesitation from the consumer and from any end user in the bigger ticket items.”

Whirlpool, too, has experienced struggling appliance sales. And Pool Corp. — one of the country’s biggest distributors of pool supplies — said that although pool maintenance spending is “stable,” pool construction and more discretionary purchases were weaker due to high interest rates.

Consumers have also become more discerning with how often or where they dine out. Restaurant sales in the quarter largely disappointed Wall Street amid traffic struggles.

Starbucks CEO Laxman Narasimhan told analysts, “We continue to feel the impact of a more cautious consumer, particularly with our more occasional customer. And a deteriorating economic outlook has weighed on customer traffic, an impact felt broadly across the industry.” McDonald’s added that “the consumer is certainly being very discriminating in how they spend their dollar.”

What has become clear this earnings season is that U.S. consumers are increasingly price-sensitive, particularly when it comes to those everyday purchases. Bank of America’s Savita Subramanian notes that “consumer cracks are emerging,” especially among lower incomes.

Here are just some of the companies warning about price sensitivity:

• Both Coca-Cola and PepsiCo have observed behavioral shifts in consumers seeking out value, particularly at the low end.
• Meat producer Tyson Foods told analysts that cumulative inflation pressures have “created a more cautious, price-sensitive consumer” and that it’s experiencing “a little slippage to private label with lower-income households.”
• Hershey said that it continues to see “value-seeking behavior from consumers.”
• Special K and Pringles owner Kellanova saw a 5% decline in North America volumes amid elasticity pressures as a result of prices being 5% higher than a year ago.
• Burger King and Popeyes parent Restaurant Brands noted, “We’ve seen consumers become a bit more sensitive to price, resulting in moderating check growth.”
• Footwear and apparel maker Steve Madden bluntly said, “We do see a customer that still is price sensitive” and noted that its outlet stores have outperformed its full-priced business.

Weakness in the lower-end consumer could pose issues for discounters like Dollar General and Dollar Tree as well as off-price retailers like TJX, Ross Stores and Burlington Stores when they all report earnings in the coming weeks.

Amazon succinctly describes the new normal: “Customers are shopping but remain cautious, trading down on price when they can, and seeking out deals.” Etsy shared that same sentiment: “Consumers feel really pressured and so they are seeking value and deep discounts and deep promotions.”

As a result, companies are now being forced to compete for consumers’ dollars via promotions and deals. Some have found at least near-term success.

Shake Shack said its sales improved from February through April thanks to effective promotions and offers. Domino’s said its revamped loyalty program has helped sales. Taco Bell’s value menu has incentivized guest visits.

While there’s growing pressure on companies to cut prices to win over consumers, sticky inflation in food, energy, labor and other input costs poses a major hurdle to profitability for restaurants, retailers and consumer product firms alike.

Most companies have already seen decelerating pricing power in recent quarters — partly due to the more challenging demand climate and partly due to prices already being at very high levels. 

Shake Shack said it raised prices in mid-March, but executives told analysts they have “no current plans to further increase price this year.” That decision was made even though they “expect inflationary pressures in wages and food and paper to persist.”

With a greater focus on promotions, profit margins will be under more pressure. Look at Starbucks, which saw margins that both missed Wall Street estimates and shrunk compared to a year ago. One of the reasons cited in its earnings report for the disappointing margin performance: “increased promotional activities.” Compound that with weak traffic, and it’s a recipe for trouble.

Ultimately, as companies face more pricing pressure ahead, they will likely have to rely on other cost cuts or effective cost management to help preserve their profit margins in the coming quarters.

Brace yourself for an intriguing retail earnings season in the coming weeks.