The latest quarterly figures of U.S. retail paint a clear picture of current consumer sentiment: While low-income households are increasingly struggling to meet their basic needs, middle and higher-income consumers are increasingly looking for bargains.
One of the biggest losers was Dollar General. The stock of the discount chain, whose core customer base has a household income of less than $35,000 per year, lost about one-third of its value after disappointing quarterly results. The chain reported that sales significantly declined at the end of each month – a sign that many customers cannot stretch their paychecks throughout the entire month.
More than 60% of Dollar General customers surveyed reported having to make cutbacks due to rising prices of basic groceries. Most feel financially worse off than six months ago. Alarmingly, about a quarter of those surveyed expect to be unable to pay a bill in the next six months.
This development also reflects consumer confidence in the USA. According to the Conference Board, confidence among consumers with an income of less than $25,000 decreased in August, while overall confidence rose to a six-month high. Despite more moderate inflation in food and energy, household savings are declining, and the labor market is showing initial signs of cooling.
The problem for discount stores like Dollar General could be that middle- and higher-income consumers are not forced to rely as much on cheaper options. According to Scot Ciccarelli, an equity analyst at Truist Securities, the still-strong employment situation prevents these consumers from flocking en masse to discount stores like Dollar General.
Instead, these consumers are more likely to be drawn to large retailers like Walmart and Target, which reported healthy sales growth in August. Both retailers have lowered prices on thousands of frequently purchased items to attract customers, and Walmart reported that its market share is growing among higher-income households.
At the same time, consumers are looking for bargains on non-essential purchases by increasingly browsing discount stores like Burlington, TJX (parent company of T.J. Maxx), and Ross Stores. These off-price retailers reported better-than-expected sales growth. Burlington noted that the economic pressure felt by low-income consumers is now extending to other income brackets, and customers are increasingly turning to cheaper stores.
Mid-priced department stores like Macy's, Kohl's, and Dillard's, all of which recorded declining sales in the last quarter, seem to be suffering. Kohl's, which serves a middle-income demographic, reported that its customers are "feeling the burden of higher living costs" and that shopping sizes in the second quarter were smaller than the previous year.
In contrast, the upscale department store Nordstrom reported a 0.9% increase in sales for the second quarter, with the spending of higher-income customers growing the most. The discount chain Nordstrom Rack achieved an even more impressive growth of 4.1%.
Although retailers have so far been able to control their costs and protect their profit margins, this could change in the coming quarters as companies begin to discount aggressively. Kohl's announced that it will be even more "promotion-intensive" in the holiday quarter, and Dollar General also expects more discounting in the coming quarters. One bright spot is that many of these retailers have reduced their inventories more than their sales declined, indicating that there will be no large quantities of unsold products to clear in the next quarter.
Sure, the heading translates to:
"One thing is clear: Consumers only open their wallets if they sense a real bargain.
