The Health of the Consumer

Brief Success from Holiday Spending Propped up by Higher Prices, Not Volume, with Most Point to Slowing Trends through Q4

• Cracker Barrel (Restaurants): “Predicting becomes even more challenging when we try to weigh the impact of the current macro drivers on particular groups such as over 65 and lower-income guests and travelers. We’ve seen this play out month-to-month on the sales side since we began our fiscal year in August. August and September sales were strong, but then we saw softening in October. November sales exceeded our expectations due to a strong holiday performance and increased special occasion catering but we noticed slightly lower dine-in traffic.”
• Dollar General (Discount Stores): “We continue to see customer behaviors in Q3 that we believe indicate they are feeling increased financial pressure, including reductions in the number of items purchased per basket and in discretionary spending, which was softer than anticipated during the quarter. Customers also continued to shift spending to more affordable options, such as items that are dollar price point and private brands, while also shopping closer to payday at the first of the month. Importantly, we are growing more productive with our core customer as well as seeing an increase in customers with annual household incomes up to $100,000.”
• Walmart (Discount Stores): “You can see behavioral change now with basically all income levels in the country as people are more price sensitive. They are more selective on discretionary purchases. They’ll buy the things that they need…I think that means that this Christmas, if you look at a top-line point of view, we’ll look better because of inflated dollars than it actually is. If you look at units and the quality of the breadth of what sells at retail as a retailer, we won’t feel great about the quality of this Christmas.”
• Victoria’s Secret (Apparel Retail): “The start of November up until the Black Friday weekend seemed to be very much a continuation of the trend from the third quarter, a reflection of a very cautious customer in a challenging economic environment. However, since Black Friday, our customers have responded positively, and we’ve been very pleased with an uptick in the trend and our level of performance.”
• Petco (Specialty Retail): “Our consumables and services businesses continue to be largely nondiscretionary with strong growth expected to continue. While we fully expect the typical seasonal uplift of the holidays from Q3 to Q4, given the current broader uncertainty in consumer dynamics and spending behaviors, it’s prudent to anticipate EBITDA may be in the lower end of the range.”
• La-Z-Boy (Furnishings, Fixtures & Appliances): “While still up versus pre-pandemic levels, our industry is experiencing a slower pace of store and e-commerce traffic versus last year, a reflection of macroeconomic concerns and geopolitical uncertainty weighing on consumer sentiment, as well as a shift in discretionary spending patterns post- pandemic. These factors again impacted our written business in the quarter.”

Consumers Trade Chef Specials for the Apron; Grocers and Packaged Foods Benefit from Value Shoppers Amidst Wave of At-home Cooking

• Campbell (Packaged Foods): “Our customer insights show that consumers continue to cut back on out-of-home eating and are migrating from more expensive grocery categories as they seek ways to ease the impact of inflation. Consumers are making changes to stretch their budget and following several years of becoming more confident and comfortable with cooking, they continue to turn to our categories.”
• Kroger (Grocery Stores): “When we talk to our customers, they’re telling us they’re changing. But so far, they’re changing on purchases other than food. Our research shows cooking at home is still 3x to 4x less expensive than dining out, and we are seeing more customers engage with our brands as a way to stretch their food budgets without compromising on quality.”
• Casey’s General Stores (Specialty Retail): “With the lower-income consumer, we’re seeing a couple of different changes. They’re certainly shifting more to private label product and seeking out value. We see them trading into more ethanol blended fuels that tend to price cheaper at retail than non-ethanol blended fuels. We’re also starting to see some behavior where customers are taking different products and using those as meal replacements. Think of a protein shake or enhanced juices as an alternative to a meal.”
• Hormel Foods (Packaged Foods): “In retail, we expect demand for our center store grocery business to remain strong as consumers continue to seek products and brands that offer high value, versatility and convenience.”

Price Sensitivity Increases Amidst a Competitive Retail Environment; Companies Push Value Messaging

• Ollie’s Bargain Outlet (Discount Stores): “We continue to invest to alleviate price and to motivate consumers as the competitive environment is highly promotional.”
• AutoZone (Specialty Retail): “In our discretionary categories, we were down 2.5%. And if you think about where consumers are feeling the most pressure today and where that pressure actually manifests itself, it manifests itself in discretionary purchases. We experienced 11% pricing inflation in line with cost of goods, which was also up 11%. We believe both numbers will decrease slightly in the current quarter as we begin to lap the onset of high inflation last year.”
• Cracker Barrel (Restaurants): “Given the prevailing environment, we believe preserving our value leadership is a critical importance and we’ll be leaning further into value messaging in the upcoming months. From a pricing perspective, we remain thoughtful with how we’re taking pricing and are being mindful to preserve the value sections of our menu and to maintain attractive entry price points.”
• Macy’s (Department Stores): “We do see consistently in this environment, particularly, that customers care about buying what they want, but buying what they want with great value. [We take a detailed look] at how we’re positioned relative to the competition for perfect match items, for like items and also where we can differentiate.”

Across Industries, Analysts Address the Elephant in the Room; Be Prepared to Address Any Inklings of a Shifting Consumer

Analyst Questions:

• Casey’s General Stores (Specialty Retail): “On the consumer, what behavior changes are you seeing, either during the quarter and then possibly into November? In the context of the lower prices at the pump, I’m curious if there’s been any change there? Inside your store, have there been any changes with down-trading, pack sizes, etc.?”
• Kroger (Grocery Stores): “My question is more short-term. We’ve heard some retailers, not necessarily in the food industry, but some retailers that the consumer behavior has changed somewhat abruptly as we work through the fall. Is that something you guys have seen? And if yes, do you think it’s started to leak into the competitive environment?”
• Petco (Specialty Retail): “What is the percentage of the business that you would define or classify as discretionary? And is the underlying run rate stable? Or are those products decelerating?”
• Dave & Buster’s (Entertainment): “Recognizing that the overall momentum of the business is still strong, is there any reason to believe there has been a touch of a slowdown? Is there any reason to believe that you’re seeing any pushback from some of the pricing adjustments at the game level maybe that you made? Do you have any metrics or data points that you’re watching to gauge that?”