Earnings season continues this week with Target, Walmart, TJ Maxx parent company TJX and other high-profile retailers set to release their quarterly results.
Resilient consumer spending has supported the economy through the Federal Reserve's interest rate hiking cycle. But signs of some belt-tightening emerged in the first quarter, as consumer spending on discretionary items began to sink, hurting some big stores.
Although spending on goods ramped up during the height of the pandemic, consumers in recent years have favored opening their wallets for experiences like travel and dining out, after spending time cooped up indoors.
Shoppers have tightened their purse strings in the face of higher prices and borrowing costs, focusing on paying for necessities like groceries over discretionary purchases like clothing or home improvements.
That shift showed up in earnings results for retailers including Home Depot and Target earlier this year. Since then, Target's stock price has fallen by about a quarter and hasn't recovered much.
"We continue to face elevated volatility and see a reprioritization of spending away from discretionary categories in the face of persistent inflation in groceries and essentials," Christina Hennington, chief growth officer at Target, said during the company's earnings call in May.
Analysts expect Target's revenue to slip but profit to jump from the year earlier period, according to Refinitiv.
Retailers that are known for their affordable prices have seen a boost to sales from consumers searching for bargains.
"Customers continue to seek value given the impact of inflation," Walmart CEO Doug McMillon said on a call with analysts in May.
For Walmart, analysts expect a rise in revenue but dip in profit. Analysts expect TJX's top-and bottom lines to see a gain from last quarter.
Economic data has signaled that consumers haven't completely closed their pocketbooks.
US retail spending, which is adjusted for seasonality but not inflation, inched up in June but fell below economists' expectations. The slight increase marked the third consecutive month of gains.
Economists expect retail spending to grow 0.4% in July from the prior month, an acceleration from a 0.2% gain in June, according to Refinitiv.
Americans have also stayed relatively optimistic about the economy (more on that later), though the University of Michigan's latest consumer sentiment data last week showed that Americans became slightly less optimistic in August, a reversal from two straight months of growing confidence.
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