Fed Interest Rate Cuts: Potential Impacts on the Retail Sector

Macroeconomic Environment and Consumer Confidence

Retail giants like Walmart, Home Depot, Amazon, Costco, and Target highlight the challenging macroeconomic environment, marked by inflation, high interest rates, and shifting consumer behavior. These factors contribute to an uncertain consumer confidence landscape, impacting retail demand and necessitating value-driven strategies.

"Other Information ." We expect continued uncertainty in our business and the global economy due to inflationary trends, a challenging macro environment, geopolitical conditions, supply chain disruptions, volatility in employment trends and consumer confidence." --- (WMT, sec filing, 2025/Q1)

"The decrease in comparable customer transactions reflects the impact of macroeconomic factors, including the continued shift in consumer consumption trends away from goods and towards services and the impact of a high interest rate environment, pressuring home improvement demand." --- (HD, sec filing, 2024/Q1)

"During 2022, we faced a number of challenges.We saw prominent macroeconomic headwinds as the world adjusted to life post COVID, including the highest levels of inflation we've seen in Amazon's history and an overall uncertain consumer environment." --- (AMZN, event transcript, 2024/05/22)

"So we're seeing that benefit from both sides of the consumer that great value in both areas are doing very well." --- (COST, earning call, 2024/Q3)

"While our team is always committed to value, it's particularly important in today's environment as consumers look for ways they can stretch their budgets in the face of suddenly high prices." --- (TGT, earning call, 2025/Q1)

Impact on Consumer Spending

Consumers are prioritizing spending on services and experiences over general merchandise, with stretched budgets leading to more spending on non-discretionary items. Faster delivery times and price reductions on everyday essentials are influencing consumer behavior, but macroeconomic pressures like high inflation continue to challenge the retail sector.

"Consumers continue to make tough choices with their budgets, trading down in some areas, while still prioritizing spend in others, like services and experiences like travel." --- (BBY, earning call, 2025/Q1)

"Many consumer pocketbooks are still stretched, and we see the effect of that in our business mix, as they're spending more of their paychecks on non-discretionary categories and less on general merchandise." --- (WMT, earning call, 2025/Q1)

"Faster delivery times have another important effect. As we get items to customers this fast, customers choose Amazon to fulfill their shopping needs more frequently, and we can see the results in various areas, including how fast our Everyday Essentials business is growing and the continued increase in Prime member purchase frequency and total spend with us." --- (AMZN, earning call, 2024/Q1)

"Consumers will enjoy savings on everyday items such as milk, meat, bread, soda, fresh fruit and vegetables, snacks, yogurt, peanut butter, coffee, diapers, paper towels, pet food and more." --- (TGT, press release, 2024/05/20)

"In the first quarter of fiscal 2025, we generated $8.8 billion in revenue and our comparable sales declined 6.1% as we continued to operate in a consumer electronics industry that is challenged by various macroeconomic pressures, including high inflation, increased spending outside the home in areas such as travel and entertainment and lower levels of product innovation." --- (BBY, sec filing, 2025/Q1)

Effect on Borrowing Costs and Capital Expenditures

Retail giants are experiencing increased borrowing costs and are planning significant capital expenditures. Walmart's short-term borrowings rose to support growth, while Lowe's highlighted potential adverse effects on borrowing costs from debt rating downgrades. Home Depot, Amazon, and Costco are all planning substantial capital investments in 2024.

"Our working capital deficit was $18.9 billion as of April 30, 2024, which increased when compared to the $17.0 billion working capital deficit as of April 30, 2023, primarily driven by an increase in short-term borrowings and an increase in accounts payable to support business growth, partially offset by a decrease in accrued liabilities due to payments related to the opioid legal settlement." --- (WMT, sec filing, 2025/Q1)

"The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios." --- (LOW, sec filing, 2024/Q1)

"For fiscal 2024, in line with our expectation of approximately two percent of net sales on an annual basis, we plan to invest approximately $3.0 billion to $3.5 billion back into our business in the form of capital expenditures, with investments focused on new stores and improving the customer experience, including through technology and development of other differentiated capabilities." --- (HD, sec filing, 2024/Q1)

"We expect cash capital expenditures to meaningfully increase in 2024, primarily driven by investments in technology infrastructure." --- (AMZN, sec filing, 2024/Q1)

"Regarding capital expenditures, Q3 spend was approximately $1.06 billion, and we estimate full year 2024 capital expenditure will be between $4.3 billion and $4.5 billion." --- (COST, earning call, 2024/Q3)

Influence on Retail Sales Trends

Retail giants like Walmart, Best Buy, and Target emphasize the importance of comparable sales as a key metric for evaluating revenue performance. Fed interest rate cuts could potentially boost consumer spending, leading to positive trends in comparable sales, as seen in Walmart's and Best Buy's recent performance improvements.

"We focus on comparable sales in the U.S. as we believe it is a meaningful metric within the context of the U.S. retail market where there is a single currency, one inflationary market and generally consistent store and club formats from year to year." --- (WMT, sec filing, 2025/Q1)

"We believe comparable sales is a meaningful supplemental metric for investors to evaluate revenue performance resulting from growth in existing stores, websites and call centers versus the portion resulting from opening new stores or closing existing stores." --- (BBY, sec filing, 2025/Q1)

"In the second quarter, we are planning for a comparable sales increase in the 0% to 2% range." --- (TGT, earning call, 2025/Q1)

"Next to sales, gross profit growth was the key driver of upside in Q1. Consolidated gross margin expanded 42 basis points, led by Walmart U.S. Across segments, we benefited from lower markdowns as a result of disciplined inventory management and favorable business mix, enabling strong margin flow through from sales." --- (WMT, earning call, 2025/Q1)

"We have seen early signs of improvement as year-over-year comparable sales for laptops turned slightly positive in the fourth quarter and that trend continued in Q1." --- (BBY, earning call, 2025/Q1)

Impact on Inventory Management and Supply Chain

Retailers are enhancing supply chain systems to reduce damage and costs (BBY), integrating end-to-end solutions for efficiency (AMZN), and making inventory accessible online (COST). Effective inventory management is driving profit growth (WMT) and improving margins (TGT).

"For example, in [supply chain] (ph) we made enhancements to our systems and process guidelines that reduced TV damage in Q1, and we expect the savings to build throughout the year." --- (BBY, earning call, 2025/Q1)

"We're working towards warehouse inventory online. So members could use that in the app." --- (COST, earning call, 2024/Q3)

"And then I would say that supply chain with Amazon is really an abstraction on top of those individual building block services I just mentioned that makes it easier for customers to have the whole end-to-end supply chain integrated." --- (AMZN, earning call, 2024/Q1)

"As it relates to the core, strong same-store sales growth combined with good inventory management resulted in strong profit flow through." --- (WMT, earning call, 2025/Q1)

"Corey Tarlowe: Great. And then just as a follow-up, one of the things that's also clear with Target is that strong inventory management helps to unlock better margins." --- (TGT, earning call, 2025/Q1)

Effect on Real Estate Costs

Fed interest rate cuts could lower borrowing costs, positively impacting the acquisition, development, and ownership of real estate for retailers like Costco, potentially reducing overall real estate expenses.

"and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, capital spending, actions of vendors, rising costs associated with employees (generally including health-care costs and wages), energy and certain commodities, geopolitical conditions (including tariffs), the ability to maintain effective internal control over financial reporting, regulatory and other impacts related to climate change, public-health related factors, and other risks identified from time to time in the Company's public statements and reports filed with the Securities and Exchange Commission." --- (COST, press release, 2024/05/30)

"These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, inflation or deflation, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real" --- (COST, press release, 2024/07/10)

Adjustments in Pricing Strategies

Retail giants like Costco, Target, and Walmart are adapting their pricing strategies in response to economic changes. Costco focuses on adjusting its merchandise mix and increasing private-label items. Target aims to lower prices and enhance efficiency. Walmart employs tactical rollbacks and tests price elasticity to drive volume.

"successful historically in adapting our business to these changes, such as through adjustments to our pricing and merchandise mix, including increasing the penetration of our private-label items, and through online offerings." --- (COST, sec filing, 2024/Q3)

"Looking ahead, our team will deliver for our guests through lower prices, a seasonally relevant assortment, ease and convenience, as we keep investing in our strategy and efficiency initiatives to get back to growth and deliver on our longer-term financial goals. Guidance For the second quarter, the Company expects a 0 to 2 percent increase in its comparable sales, and GAAP and Adjusted EPS of $1.95 to $2.35." --- (TGT, press release, 2024/05/22)

"And this can be a tactical pricing strategy for us where we have the opportunity to go in and see how customers respond to these rollbacks before we make a permanent price change." --- (WMT, conference, 2024/06/12)

"There are categories of things that we need to be more responsive to. And again, we will we might go in at a lower price point, test the elasticity, see how we're driving volume." --- (WMT, conference, 2024/06/25)