Walmart and Target’s results show that Americans are struggling with inflation

First, just to be clear, Walmart won the day. The retail giant beat Wall Street earnings and revenue forecasts in the first quarter, reporting adjusted earnings per share of $0.60, compared to the expected $0.52, and revenue of $161.5 billion, topping the forecast of $159.5 billion . E-commerce offers and spending by high-income customers helped improve results. But the company also saw a key spending pattern that typically occurs when consumers experience financial hardship: a shift from spending on wants to spending on needs.

As Walmart CFO John D. Rainey explained during a May 16 earnings call with analysts: “Many consumers’ pockets continue to be stretched, and we see an impact on our business mix as consumers spend a greater share of their paychecks in non-discretionary categories, and less for general merchandise.”

Walmart said it has increased the number of price cuts, or “recalls,” of key products it offers to boost sales, in part because, as Rainey repeated on the call, it’s “putting a strain on wallets.” Asked by Morgan Stanley analyst Simeon Gutman why he declined to raise Walmart’s future earnings forecast, Rainey also gave a telling answer, highlighting his uncertainty about consumer spending.

“I think we all agree that we are far from a confident consumer environment. We read about consumer health every day, and considering that the first quarter of the year has already passed, we just want to be patient,” the CFO said.

Walmart wasn’t the only one to raise concerns about consumer health in its first-quarter earnings report. Target reported a 3.1% year-over-year decline in net sales to $24.5 billion in the first months of 2024 and missed earnings estimates, with diluted earnings per share coming in at $2.03 compared to forecasts of $2.05 dollar. According to Target, customers tired of inflation turned to necessities this quarter, leading to declining sales and profits.

In a subsequent call with reporters, President and CEO Brian Cornell said the “biggest challenges” for Target shoppers are “food and household price inflation.” Yahoo Finance reported. Cornell even added that there has been a “strain on consumers’ wallets,” echoing comments from Walmart CFO John Rainey.

In the first quarter, Target saw comparable store sales decline 4.8% as customers looked for cheaper options, and only a slight increase in online comparable sales. In an effort to prevent further sales declines, the company unveiled a plan to cut prices on nearly 5,000 everyday items such as groceries and diapers.

However, on Wednesday’s earnings call with analysts, chief growth officer Christina Hennington noted that she is paying close attention to consumers’ continued financial stress to determine the right path forward for the company, signaling that price cuts may not be enough to reignite growth .

“Continued levels of increased prices are having a significant impact on the budgets and savings of many families,” Hennington said. “Today, one in three Americans has reached or is approaching the maximum limit on at least one credit card. For these and other reasons, we remain cautious in our near-term growth prospects.”