This earnings season shows a major challenge facing retailers: shoppers reluctant to make big purchases.
To some extent, this pullback is to be expected as interest rates stay high, the housing market has stalled, and consumers are gravitating towards services rather than goods.
But retailers reporting results over the past several weeks have shown how even with an anticipated shift in consumer habits the impacts on results today are hard to ignore.
“After three years of unprecedented demand in the home improvement market, we continue to see softer engagement in big ticket discretionary categories like patio and appliances that likely reflects both pull forward of these single item purchases and deferral,” Billy Bastek, Home Depot's (HD) EVP of merchandising, said during the company’s second quarter earnings call.
The home improvement retailer said big ticket transactions above $1000 were down 5.5% year over year.
For lower-income shoppers, inflation has played a major role in holding back on pricier items.
“Our core lower-income customer remains under significant pressure and has limited capacity for higher-ticket discretionary purchases,” Big Lots (BIG) CEO Bruce Thorn said during the company's second quarter earnings call on Tuesday.
“Customers [are] continuing to hold back on higher-ticket outdoor furniture due to concerns about the economy,” Thorn added.
A clothes dryer is displayed in the appliance section of a Home Depot store in New York City, U.S. May 31, 2016. (Brendan McDermid/REUTERS)
Prices are also reflecting the slowdown in demand.
The Bureau of Labor Statistics' latest CPI report showed the cost of furnishings and supplies slipped 0.4% in July from the previous month, while major appliance prices declined 0.6% during the same period.
“Broadly speaking, we are seeing an increase in vendor-funded promotions across all of our categories, and I think appliances would be part of that,” Best Buy (BBY) CFO Matt Bilunas told analysts earlier this week. The electronic retailer's appliance sales declined 16.1% year over year last quarter.
‘Furniture is more exposed'
As consumers rein in big ticket spending, the impacts on furniture and appliance makers aren't being evenly felt.
Shanton Wilcox, US manufacturing lead at PA Consulting, told Yahoo Finance the costs associated with manufacturing appliances versus furniture enables vendors to lower prices on the former more easily than the latter.
Appliances tend to be manufactured abroad, where costs are lower, while furniture like couches or dining room sets are often made in the US for logistical reasons.
“Furniture is more exposed” to this shift in spending, Wilcox told Yahoo Finance. “Their cost structure is higher. So if they bring prices down as much as you're seeing with the appliance manufacturers, they would be in the red much faster.”
Furniture on display at a newly remodeled Walmart store in Teterboro, New Jersey, June 7, 2023. (Siddharth Cavale/REUTERS)
Taylorsville, N.C.-based Mitchell Gold + Bob Williams shut its doors last weekend, citing weak sales and trouble securing financing. Asheboro, N.C.-based Klaussner Furniture Industries closed earlier in August after 60 years in business because the company's lender stopped providing capital. And late last year Big Lots' major supplier United Furniture fired its 2,700 employees and later filed for bankruptcy protection, citing debts of more than $100 million.
“As companies added additional capacity and labor to meet the demand [during the pandemic], they now have to cut that back. And if they can't cut it back then they are actually closing plants and bankrupting entire companies,” said Wilcox.
Consumers ‘on the cusp'
The slowdown in demand for durable goods isn't having a major impact on manufacturing jobs, so far.
The latest US employment report showed employment within the sector remained unchanged, though overtime edged down 0.1 hour to 3.0 hours. Part of the muted reaction may have to with strength in other areas of manufacturing, however.
“There's a shift going on within manufacturing. Auto right now is still holding the fort down if you will — continuing to attract consumer spending,” said Wilcox.
However, economists are watching for continued pressure on the consumer as households draw down their savings accumulated during the pandemic amid a “higher for longer” interest rate environment.
“Consumers are on the cusp in terms of thinking there may be a recession,” Dana Peterson, chief economist at The Conference Board told Yahoo Finance on Friday after August's jobs report was released.
“The last piece of the puzzle is the consumer. We think the consumer is going to run out of steam,” she said.
“When you look at credit card users, there is still a lot of consumers who really can’t afford what they’re spending. And how many vacations are you going to on in one year? All of that is going to run out of momentum we believe.”
