Retail Earnings Preview: Will Inflation’s Chill Deliver the Iciest Holiday Season

 | Feb 07, 2023 01:38PM ET

Few things shape economic perceptions more than the prices people pay daily at the grocery store, shopping center, or gas pump. And as 2022 wrapped up, the retail sector once again likely reflected how consumers grasp sudden shocks to their household finances.

Based on how December U.S. Retail Sales looked, the answer is likely not terribly well. As inflation shot up in 2022, every retail category but grocery, building materials and sporting goods took a tumble.

This isn’t the first recent holiday season to test retailers. In 2020, it was a global health crisis that reset workplaces, personal savings, and available goods. In 2021, another burst of COVID-19 hit in December and sales dropped below expectations. And at the end of 2022, it was 10 months of spiraling inflation that peaked at 40-year highs after an extended near-zero rate environment during the two previous years.

So we know the big headlines. How will retailers see the picture as they report Q4 results in the coming weeks? Did consumers close their wallets overall, or did they simply divert that spending toward travel, dining out and other “experiences” that were so limited during the worst days of the pandemic?

Remember—what happens in households often portends what’s next for the global economy. After all, consumer spending comprises roughly 70% of Gross Domestic Product.

For now, let’s look at trends that likely shaped the final quarter and what could be revealed in Q4 results starting mid-month:

  • Black Friday got bleaker: As of last week,U.S. retail sales figures had fallen in three of the last four months. But December was the real eye-opener (see Figure 1) because many consumers basically froze their spending in the retail economy that had been so robust since the pandemic. You probably know what happened to spending on personal and business technology and to companies like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). We’ll get fresh retail sales numbers for January on February 15.
  • Inflation’s pinch seems far from over:On February 3, January’s employment figures managed to pin the market’s ears back in more ways than one. Retailers may have cheered data indicating worker demand remains strong—providing at least some evidence that customers still have money to spend. But retailers also feel wage pressure. Then there’s the question of how much disposable income is really out there. In December, a study from PYMNTS and LendingClub (NYSE:LC) reported that 63% of Americans were living “paycheck to paycheck,” with a notable increase among consumers making more than $100,000 per year. If hiring and wage levels finally start to recede, we may see staffing and store count changes at some retailers and more extreme decisions at others, such as long-troubled Bed Bath & Beyond (NASDAQ:BBBY), which announced plans to shutter nearly 90 stores just last week.
  • Revolving credit rates keep rising: Academics and economists will likely be studying—and debating—the effects of COVID-19 stimulus programs for years to come. But consider what federal aid did for household savings (see Figure 2) and how quickly that cushion lost stuffing when aid began to shut off at midyear 2021 and 40-year inflation began to settle in. When prices go up, many households make do with credit card spending, and Bankrate reports the average credit card rate is up 4 percentage points since last March to an average 20%. And though credit delinquencies are still at historic lows, TransUnion (NYSE:TRU) thinks that serious credit card delinquencies may rise this year to their highest levels since 2010.