Meg Galgano heads up business consulting for RetSci. She also listens to more retail earnings calls than anyone we know. The other day we got together to talk about retail trends from the first quarter earnings calls.

Meg, to start with, if you don’t mind, if you could share a little bit of your background and what you’ve done in retail up till now.

Sure! It truly has been retail. My entire career prior to joining RetSci has been in the corporate retail space. Most recently as a senior director of retail allocation for a multi-billion dollar retailer. Prior to that, I led the US store planning team focused on store level inventory, attribution, and analytics. Before that, I was a leader on the distribution team for a large multi-billion dollar furniture retailer. So it’s been retail my entire life from my college internship until now.

I guess at this point we’re well past Q1 earnings, but I know there were some key things that jumped out. What were the most important or the key items that really struck you in the earnings calls?

Year of Moderation

Sure, there’s quite a few trends, but you know, overall there were mixed results across retailers. So it depends what category they were in, what their focus was, what their performance was last year. Obviously, total US retail sales were up 3.6%, but there was definitely variation once it came to individual retailers. I think one of the terms that I heard specifically on one of the calls, but the theme was carried through many of them, was 2023 is planned to be a year of moderation. So that was actually said on the Home Depot call, but that theme was carried through in quite a few different retailers. That’s what we’re going to see as we sort of level set. We haven’t had a normal year in quite a few years. I don’t know if normal exists anymore, but we haven’t had a normal year. I think this being a year of moderation, it’ll be interesting to see how it continues to play out for the remainder of the year.

Absolutely. What else did you see?

From a trend perspective, there were quite a few things that were interesting. I always have to work to narrow this stuff down because I could talk about it forever, but there are a handful that I’ve got for you. The first one was that lots of retailers called out the declining trend across the quarter. So when we look at the sales, March was about half way through and many retailers noted that their sales dropped off significantly. That isn’t shocking, if you think about what was happening from an economic environment perspective. That’s right around the time that Silicon Valley Bank collapsed and that shook consumer confidence. Lots of people called that out to degrees, but quite a few called out the declining trend throughout the quarter. It will be interesting to see how that plays out in Q2 as well.

Discretionary Spending

The next thing, which will be a surprise to no one, is discretionary spending is the place where reduction has taken the most extreme dive. You know with high inflation and people concerned about the economy, that’s where they focus. They focus on needs, not wants. And that’s the place that we’re seeing it. People are spending less money on apparel and home decor and sporting goods and electronics and leaning into grocery.

You can see that when you look at the comparison between Target and Walmart. More than half of Walmart’s business is driven by grocery. Their performance has been excellent because they are primarily a non-discretionary business. So yeah, not surprising. But we saw many retailers talking about it. Even Walmart talked about a decline in their discretionary categories. So that will probably continue as long as the economic factors are having an impact.

That leads to the next topic, which is that there were quite a few economic factors that were called out specifically by retailers in their earnings calls. Now, none of us think that there is a stellar economic environment right now. But many people called out that there were lower tax refunds than historically, and lower ones than lots of people expected. In the retail space, you often see a bump when it comes to when tax refunds start being paid out. And if it’s lower than expected, nobody gets that bump.

There also was the elimination of the child tax credit. That had a significant impact. Also, a reduction in SNAP benefits in the states that had not continued the extension from COVID. All of those have significant impacts when it comes to people’s ability to spend on discretionary and non-discretionary categories.

Inflation

Then, a related topic would be inflation. Sure, it is significantly down from where it was at its high, which was about a year ago in June of 2022. Back then it was at more than 9%. When you look across what counts as generally, you know, Q1, it was at 6% in February, 5% in March, and 4.9% in April. It is declining, but it is still significantly above where it was two years ago. As a result, the cost of life in general is more and the places where we’ve had the most significant increases are in non-discretionary categories. Food is significantly higher than it was two years ago, both groceries and eating out, as well as gas. Gas is down compared to last year when it was very, very high. But it is still much, much more than historically where it has been.

Yeah, those hurt big time. What about any non economic or other factors that really jumped out?

There are. One of the other things that was interesting is that the international markets are performing better than the US markets, especially in more luxury type businesses. Lululemon, for example, their China business posted a 79% increase, while US posted an 18% increase. Both of those are good, but that China number is aggressive. Part of that has to do with expansion, both store expansion and business expansion. But it also has to do with the sentiment of the overall customer. You also see that in Ralph Lauren. Ralph Lauren had a 20% comp in Asia and 8% comp in Europe and a -4% in the US. So consumer sentiment and confidence is different when we look country by country and specifically the US is feeling the most uncertain about the future and we’re seeing that in performance for sure.

Another trend is overall shopping patterns. Consumer behavior is shifting back to maybe a little bit closer to what it was pre-COVID. More just in time shopping and less bulk buying. I think there are a couple of drivers of that. One, there is less bulk buying and less buying ahead of time because consumers have less discretionary money to spend. That means you can’t buy three of something. You just buy one. When you’re done with that one, you buy your second one, instead of buying all of them upfront. Then the second thing is that there’s less of a necessity to bulk buy when our supply chain is no longer as challenged as it was a year ago. There’s no longer a driver to buy three of them while they are available because they may not be in stock next time. So we don’t necessarily have that same issue that would have driven the bulk buying to begin with.

That also brings up the next factor, which is normalization within the supply chain. Not only from a timeline perspective and people being able to get things, but there are less port delays, there are less truck shortages, container shortages, all of those things. Also there is impact from a cost perspective. Because the demand isn’t so high, retailers are able to go back to sort of a more normalized process, which has margin benefit for them. They’re able to feed that through into better profit. Quite a few people called that out on their calls. Most interesting I think is probably Costco who called out that they eliminated the contract that they had set up independently with a transportation company. They canceled it with a bit of a penalty, but did that so they could go back to shipping through regular sources and regular channels.

Weather

There’s two more that I have for you. One is weather. If you’re not directly involved in retail, it’s easy to think, well, sure, it snows, stores close. That impacts retail sales. That’s the weather impact. But it’s much bigger than that. And it’s probably a little more extreme than people recognize. This year there was a later start to spring than normal. It was also just colder in the beginning of the year. That impacts when people shift over into their “oh, it’s warm” mindset and start doing yard projects and start doing home repair projects. That impacts when they switch over their wardrobe and buy their kids their summer clothes and things like that. That had a significant impact called out by many, many, many retailers.

Organized Retail Crime

Then the other one, which we continue to see, is shrink. Shrink was called out by lots of retailers. I listen to lots of earnings calls and I didn’t start hearing this on multiple calls until about a year ago. Then it started to increase both by the number of people who are calling it out and the companies that are noting it. When we talk about shrink though, we’re not talking about primarily a person walking in and quietly sneaking a single item into their bag. We’re talking about organized retail crime. Retailers are having to take action to make sure that this doesn’t have a continued impact on their overall business. They’re doing things like adjusting their assortment and maybe not keeping the higher end, smaller items in their stores. Some places are closing stores in locations that have a high risk, adding security measures like tethering, putting things in cabinets and locked cabinets, and even working with legislators to come up with legislation that helps mitigate this as a risk for them. Target called out that they’re expecting almost a half billion dollars of impact on their total revenue this year due to shrink. So it continues to be called out by lots of companies and it’s growing. I think we’re going to see a broad impact on what stores look like when we shop and the availability of inventory and whether it’s self-service or something that you need someone to get it for you. I think we’re going to continue to see that change, what retail looks like and what our shopping experience looks like, which will be really interesting.

“Always a Good Time”

It will be sad, but interesting. So maybe on a happier note, why don’t we wrap up with maybe the funniest thing you heard across all of the earnings?

I think that probably always goes to the Costco call. I truly enjoy the Costco call. I listen to it always. It’s action packed and super fast with tons of stats and numbers and things, but they’re always very… “sassy” is the word I’m going to use. You know, analysts ask them questions and their answers are just hysterical. And I always love it. They’ll say, “you know I can’t answer that” or “good try, I’m not going to answer that.” I just always think it’s funny. So if you’re going to pick one to listen to next quarter, I highly recommend Costco’s. It’s always a good time. It’s very approachable.

Well, fantastic. Thank you for going through all of those. I think they were some really good key points and trends and we’ll look forward to doing it again next quarter.