8/19/2022: Retailers Revenue Up Due to Price Increases

Consumers are spending more, but buying less

Walmart, Home Depot, and Target all reported earnings this past week. The common theme across all the big retailer earnings is that revenue is up, not due to increased sales volume but due to price increases. Home Depot said the number of transactions fell by 3% from a year ago but revenue rose 5.8%. Though they all expect sales volume to get better from the back-to-school shopping season and home improvement projects after people return from summer vacation. They are already seeing a lot of rebound in July as gas prices ease. Walmart also mentioned that more high income shoppers shop groceries at their stores as food prices skyrocketed. They are seeing rapid changes in consumers’ spending patterns. During the pandemic, people were buying big ticket items like furniture or large appliances but they stopped doing that. They had to discount deeply to clear their inventory to adapt to these changes.

July 2022’s retail sales report was also released this past Wednesday. The overall retail purchases in July was flat compared to June while the economists expected a 0.1% increase. Excluding gasoline and autos, retail sales rose a better-than-expected 0.7%. (These numbers are not adjusted for inflation.) The retail sales only represent the goods portion of the economy. The service portion, which is not included in this report, is a much bigger part of the overall economy and has been growing fast after the lockdown is over. (Disney park sales are up 70% YoY in Q2 2022.) I believe what we are seeing is that the nominal GDP is still growing fast but real GDP is a different story as the inflation stays at 8+% level. As long as the unemployment rate remains low, I don’t think we are going to see an apocalyptic situation in consumer spending any time soon. But the inflation numbers for the next few months would be critical as it would dictate how high interest rates will go. We haven’t seen the Fed fund rate higher than 6% since 2000. I frankly don’t know what will happen if the rate reaches that level again. All I know is that 2000-2002 was quite a brutal bear market that wiped out a lot of investors.