April 14, 2024

The supply chain snarls that followed the pandemic have been mostly unsnarled. Inflation has fallen far below its 2022 peak. And the economy continues to hum, with the recession forecasts that dominated last year well in the rearview mirror.

But many of America’s biggest retailers are still dealing with a tangled mess: too many stores, too much product, and shoppers still too spooked by high prices to buy anything they don’t really need.

A slew of quarterly earnings reports by retailers in recent weeks highlighted lingering inventories, over-performance by lower-price brands, and inflation-wary customers reaching for the cheapest options.

“Value is still very front and center,” said R.J. Hottovy, a researcher at the analytics company Placer.ai. “And we’re still seeing a price-conscious consumer.”

While the specific business challenges vary from company to company, the overall dynamics are hitting firms across the sector — from retail giants and discounters to both midscale and downscale apparel sellers. In earnings calls, executives have touted their strategies to build customer loyalty, meet those customers where they are — and sometimes to do it with fewer stores and fewer employees.

Retailers are seeing that consumers want their money to go further. At The Gap, that means its lower-price subsidiary Old Navy is driving parent company Gap’s earnings. Old Navy saw a 6% rise in sales during its fourth quarter, the company said this month. And Gap beat Wall Street’s earnings expectations partly by cutting costs and reducing its inventory by 16%.

Read more: Best Buy and other retailers started 2024 by closing stores. Analysts say they’re not done

Even higher-end Nordstrom found that consumers are turning to its discount chain Nordstrom Rack. Net sales at traditional Nordstrom stores fell 3% year-over year to about $2.9 billion, the company said. But sales at Nordstrom Rack stores grew 15% to $1.4 billion.

And discount retailers are also feeling the pressure, said Adam Orvos, Ross Stores’ chief financial officer.

“While inflation is moderating, prices for necessities like housing, food, and gasoline remain elevated and continue to pressure the low- to moderate-income customers’ discretionary spend,” Orvos said on an earnings call earlier this month.

Less than 40% of in-person shoppers are visiting full-price stores to buy their clothes, according to a January report by Placer.ai. Hottovy said off-price retailers like T.J. Maxx and Ross Stores benefit not only from lower prices, but also a “treasure hunt” vibe that keeps customers coming back looking for deals.

Underlying it all is the reality that consumers remain spooked by high prices. Inflation cooled from its peak of almost 9% in June 2022 all the way to an annual rate of 3.4% in December 2023, closer to the Federal Reserve’s target of 2%. But wholesale inflation — which measures the change in prices for goods and services before they reach consumers — rose 0.6% in February, a sign of lingering elevated prices.

Grocery prices have been particularly stubborn to stabilize — which may be why Dollar General noted in its quarterly earnings that shoppers are visiting the discount retailer to stock up on food to cook at home. But Dollar General said consumers are avoiding purchases of home products, clothing, and seasonal items.

“A lot of people are holding tight,” said Jerry Sheldon, vice president of the market research firm IHL Services.

Sheldon said some consumers took a big hit after the pandemic, and those forced to live “paycheck to paycheck” ultimately changed their buying patterns. Even with an economic recovery, consumers are cutting costs where they can, he said, and that means finding cheaper options, especially when it comes to groceries.

One way forward for retailers is to simply cut prices — like IKEA is doing. The Swedish budget furniture retailer pointed to cooling inflation and the declining cost of raw materials as key drivers that have influenced its markdowns.

“This is the moment for companies like IKEA to invest in pricing rather than profitability,” Tolga Öncü, head of retail at Ingka Group, the largest IKEA store owner, said on CNBC earlier this month.

Big-box retail giants like Target and Walmart may be poised to succeed in this environment. Investors earlier this month brushed off Target’s first sales drop in years and focused instead on a sharp rise in profits, sending the stock near a 52-week high. Target credited the 58% profit bump to cost-cutting, keeping inventory tight, and reducing shipping and supply chain expenses.

A day later, the company said it would launch Target Circle 360. The paid membership program, which goes live April 7, is Target’s way of keeping up with rivals like Amazon and Walmart.

Hottovy of Placer.ai said membership programs are one way retailers can increase customer loyalty.

“Once you’ve sunk that money into the membership, you tend to use it,” Hottovy said.

Shortly after Target’s announcement, Walmart said it would launch an early-morning delivery service to keep up with Amazon and Target. Tom Ward, executive vice president of Walmart U.S., said the early-morning delivery will come as “people’s expectations keep growing,” and that it’s the company’s way of meeting customers “where they’re at.”

As some retailers grapple with too much inventory — and with cost-cutting an attractive path to profitability — one way for retailers to succeed is to have fewer physical stores.

Best Buy, for example, will look to reduce its glut of inventory by closing about 10 to 15 stores during the first half of its 2025 fiscal year. CEO Corie Barry told investors late last month that the electronics retailer also plans to lay off workers.

Macy’s has said it will close 150 stores over the next three years as it reduces its footprint in malls to focus on its smaller upscale stores, Bloomingdale’s and cosmetics company Bluemercury.

And shoe retailer Foot Locker plans to close 140 stores during the fiscal year.

Hottovy said retailers are learning how to do more with less. Best Buy has piloted smaller-format stores, which serve primarily as distribution centers.

“We’ll continue to see a lot more store closures,” Hottovy said. “And I think it’s across a lot of categories, not just dollar stores.”

-Melvin Backman and Bruce Gil contributed to this article.

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