Assessing Resilience: The U.S. Retail Sector Amid Economic Challenges

Current consumer spending trends and sentiment

Current consumer spending trends indicate a shift towards services and entertainment as consumers normalize post-pandemic behaviors. However, economic pressures, including inflation and high interest rates, are causing concern and impacting demand, as seen in mixed performance across major retailers like Walmart and Home Depot.

"In addition, business trends continue to reflect a normalization in spending patterns that first emerged more than 2 years ago, a pattern where consumers are remixing their spending back into services and entertainment outside of their homes after curtailing those activities during the pandemic." --- (TGT, earning call, 2025/Q1)

"Walmart's performance suggests that consumers prioritise value and convenience, trends that recent economic conditions have accelerated. Moreover, Walmart's ability to cater to a wide range of customer needs—from groceries to electronics—has enabled it to capture a significant share of consumer spending." --- (WMT, press release, 2024/08/21)

"While comparable sales for the Company are not currently on the trajectory for the low end of the range, a negative 4% comp implies incremental pressure on consumer demand beyond what we are seeing today. We expect to open approximately 12 new stores." --- (HD, earning call, 2024/Q2)

"In addition, changes in fuel, utility, and food costs, interest rates, and economic outlook may impact customer demand and our ability to forecast consumer spending patterns." --- (AMZN, sec filing, 2024/Q2)

"And even as inflation moderates and we see sequential improvement in discretionary category trends, higher interest rates, uncertainty around the future of the economy, continued social and political divisiveness and the upcoming election cycle have consumers concerned about what lies ahead." --- (TGT, earning call, 2025/Q1)

Impact of inflation on pricing and sales

Inflation is impacting the U.S. retail sector in varied ways. While Costco reports a slight increase in gross margins despite gasoline price inflation, Target faces rising SG&A costs. Kohl's highlights the strain on middle-income consumers, and Walmart notes that inflation is not the main driver of sales results, indicating a complex landscape.

"Excluding the impact of gasoline price inflation on net sales, gross margin percentage was 10.86%, an increase of 54 basis points." --- (COST, sec filing, 2024/Q1)

"On the SG&A line, we saw a rate increase of about 130 basis points in the first quarter, reflecting the deleveraging effect of a decline in sales, combined with the impact of multiple cost increases, including compensation and benefits for our team and higher marketing expense to support the launch of Target Circle." --- (TGT, earning call, 2025/Q1)

"Well, I think it's been fairly consistent in terms of the fact that the middle income customer, $50,000 to $100,000 a year, they're squeezed with obviously inflation, interest rates, etcetera." --- (KSS, conference call, 2024/06/04)

"Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending (including the impact of recessionary fears), inflation, interest rates, regional labor market constraints, world events, the rate of growth of the internet, online commerce, cloud services, and new and emerging technologies, as well as those outlined in Item 1A of Part II, “Risk Factors.” Third Quarter 2024 Guidance" --- (AMZN, sec filing, 2024/Q2)

"These are not inflation-driven results. In the U.S., like-for-like sales inflation was about 40 basis points for the quarter, including mid-single-digit deflation in general merchandise and low-single-digit inflation in food and consumables." --- (WMT, earning call, 2025/Q1)

Supply chain challenges and their effects

Supply chain challenges in the U.S. retail sector are being mitigated by significant improvements and automation. Companies like Walmart and Target report enhanced reliability and capacity, while Lowe's emphasizes the need for a robust IT infrastructure to support these advancements. Overall, the sector is adapting positively to ongoing challenges.

"We've definitely experienced benefit from improvements in quality. The supply chain's gotten tighter." --- (WMT, earning call, 2025/Q1)

"I mean, we wanted to have a strong supply chain. We wanted to have a solid IT infrastructure." --- (LOW, conference, 2024/06/26)

"A critical factor supporting our reliability is the upstream supply chain where we've been seeing improvements as well." --- (TGT, earning call, 2025/Q1)

"And if I can just take a minute to rattle off a few of these telltales, when you think what Hector has done in the stores, in terms of shrink, in leveraging our wage investments to getting attrition way down, which is helping with safety instances, what we're doing with technology and process in the store that Ann mentioned in her remarks about not just the better in-stock, but the supply chain is delivering, but the actual on-shelf availability that all our tools are delivering, our supply chain and merchant teams." --- (HD, earning call, 2024/Q1)

"We talk a lot about some of the supply chain automation that we've done. If you take the automation that we've done in like one of our fulfillment centers, We have roughly twice the capacity and twice the throughput that we had prior to that automation to that vertical storage that we have there." --- (WMT, conference, 2024/06/25)

Growth of e-commerce in retail

Despite negative e-commerce growth in key markets like the U.K. and Germany, companies like Shopify and Walmart report significant growth in the U.S. e-commerce sector, with Shopify achieving 21% year-over-year revenue growth and Walmart's e-commerce scale increasing fourfold over five years, indicating resilience in the retail landscape.

"If you look at e-commerce growth rates in U.K. and Germany this quarter, they're negative and that's overall, and obviously, we play more in discretionary than consumables." --- (EBAY, earning call, 2024/Q1)

"We continue to gain market share in the US e-commerce market and abroad. Q2 revenue was $2 billion, up 21% year-over-year, which equates to 25% year-over-year growth when excluding the logistics businesses." --- (SHOP, earning call, 2024/Q2)

"Fortunately, we grew over $100,000,000,000 So the size of the businesses have grown, including e commerce scale in about 4x what it was 5 years ago." --- (WMT, conference, 2024/06/11)

"S, U. K. And Germany. Our 2nd and third largest markets, U. K. And Germany, have had negative e commerce growth for about 8 quarters, which is very significant." --- (EBAY, conference, 2024/05/30)

"in our Q2 outlook. We have and expect to continue to outperform the e-commerce growth rates in North America and Europe." --- (SHOP, earning call, 2024/Q1)

Strategic adaptations by retailers

Retailers are strategically adapting to economic challenges by focusing on brand reinvigoration, operational efficiencies, and strengthening partnerships. Gap has seen positive sales from its marketing efforts, while Costco leverages cost management to maintain profitability. Walmart aims to enhance customer preference, and Target is prioritizing strategic partnerships to drive growth.

"These strategic changes have begun to create a healthier core. While there's work to do, the recent brand reinvigoration efforts at Gap have resulted in positive comp sales during the last two quarters, driven by strong marketing and product execution." --- (GPS, earning call, 2024/Q1)

"When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers." --- (COST, sec filing, 2024/Q1)

""We're executing strategic priorities at Walmart that are helping us to become the customers' first choice – every day, every season, for every item." --- (WMT, press release, 2024/08/27)

"Additionally, Hennington will be responsible for further strengthening relationships with Target's strategic partners and identifying new partnerships that will differentiate and drive the retailer's business. Hennington will continue to report to Cornell." --- (TGT, press release, 2024/06/25)

"Turning to our next strategic priority. We remain focused on driving relevance and revenue by executing on our brand reinvigoration playbook, which I've referenced over the last few quarters." --- (GPS, earning call, 2024/Q2)

Future outlook for the U.S. retail sector

The future outlook for the U.S. retail sector appears positive, with major players like Home Depot and Target planning significant store expansions. Companies like Amazon and Walmart are focused on cost reduction and profitability, while Costco aims to enhance member value, indicating a strategic push for growth and sustainability.

"Net earnings were $3.6 billion, or $3.63 per diluted share. We opened two new stores in the U.S. during the first quarter of fiscal 2024, resulting in a total store count of 2,337 at April 28, 2024." --- (HD, sec filing, 2024/Q1)

"Looking ahead, we see several opportunities to further lower cost to serve and improved profitability in our worldwide stores business while still investing to improve the customer experience." --- (AMZN, earning call, 2024/Q1)

"And so we want to continue to fuel that. And so I think we have the opportunity to continue to invest in our associates, to have appropriate price gaps, invest in our future and see margins go up." --- (WMT, conference, 2024/06/12)

"We talked about our goal to open more than 300 new stores over the next decade as we continue investing in the vast majority of our existing stores." --- (TGT, earning call, 2025/Q1)

"I mean, we really do indeed see that. I think especially with our limited SKU count in the warehouse, how can we expand the offering to the members, bring value to their membership card beyond what's within our four walls or what's on costco.com and we see this as a great growth driver for us in the future and a way to bring expanded value to the members as we look forward." --- (COST, earning call, 2024/Q3)

Role of technology in retail resilience

Technology is pivotal for retail resilience, as major players like Walmart, Target, Amazon, and Shopify emphasize investments in advanced technologies. These innovations enhance customer experiences, improve operational efficiency, and integrate in-store and e-commerce capabilities, positioning retailers to navigate economic challenges effectively.

"So even we're at the retailer conferences for sure. That's exciting to be here at a tech conference because we're using technology and investing in technology in a significant way and enabling a lot of capability for consumers as well as for suppliers or brand advertisers that may be working with us." --- (WMT, conference, 2024/09/11)

"We know technology will continue to play an outsized role in the future of retail — for our team members, our guests and our business." --- (TGT, press release, 2024/06/20)

"We seek to invest efficiently in numerous areas of technology and infrastructure so we may continue to enhance the customer experience and improve our process efficiency through rapid technology developments, while operating at an ever increasing scale." --- (AMZN, sec filing, 2024/Q1)

"Let me give you a very recent example. At the end of last year and early into January, we drove significant efficiency improvements in one of our primary channels in performance marketing, where teams have created and leveraged advanced models using AI and machine learning, which now allows us to target our audiences with unprecedented precision." --- (SHOP, earning call, 2024/Q1)

"And that allows us to really increase the amount of investment that we're making both on the tech side, where we're able to create tighter coupling between things that we're seeing in store or expertise with data or technology that we have in physical stores into our e com business." --- (WMT, conference, 2024/09/11)

Competitive landscape and market share shifts

The U.S. retail sector is experiencing significant shifts in market share, driven by competitive strategies such as Best Buy's focus on key categories and Walmart's successful omnichannel model. Talent retention is also emerging as a crucial competitive advantage in this evolving landscape.

"So the question I have is, how do you view the business model today some of those key shifts that I've alluded to and how do you go to market now competitively with a much better business model?" --- (BBY, conference, 2024/06/10)

"In an increasingly competitive retail landscape, attracting, hiring and, more importantly, retaining quality talent has become a true competitive advantage." --- (WMT, press release, 2024/09/17)

"And while you're clearly gaining share, when you compare your own performance to some of the syndicated data out there, does the emerging newness suggest there's also somewhat of a rising tide in some of these categories that saw some pull-forward over the pandemic?" --- (COST, earning call, 2024/Q1)

"There is a lot of time left in year with exciting new innovations. We hold roughly one-third of the US retail sales market share in both computing and televisions, and we intend to strengthen our position in key categories like computing, home theater, and major appliances through elevated experiences, pointed marketing spend, and sharp pricing." --- (BBY, earning call, 2025/Q1)

"Rupesh Parikh: Great. And shifting gears just to market share. So Walmart has had significant success in scaling the omnichannel model in the U. S. And has continued to gain share quarter after quarter." --- (WMT, conference, 2024/06/11)