Walmart's disappointing sales and Home Depot's strength among budget-conscious do-it-yourselfers indicate middle-class American consumers are growing more tight-fisted, even as wealthier shoppers have kept supporting luxury brands like Ralph Lauren.
Earnings reports over the past month from a slate of U.S. supermarkets, home improvement stores, restaurants and luxury brands have shown consumers directing most of their spending toward essentials and putting off big projects, while still making room for affordable treats and occasional splurges.
While affluent shoppers continue to snap up Ralph Lauren (RL.N) linen shorts and prestige beauty products, lower-income consumers are stretching budgets at Taco Bell and Ross Stores (ROST.O), pairing value meals and discount apparel with essential purchases.
Aggregate spending has not collapsed, but "households are becoming much more deliberate about where their money goes," said Lale Akoner, global market strategist at eToro.
"When fuel prices increase and get above $4, perhaps there's a psychological impact to that ... consumers are making trade-offs," Walmart CFO John David Rainey said on Thursday after the company reported its slowest same-store sales growth in six years despite rolling back prices on 11,000 items.
Price cuts alone may no longer be enough to compel a reticent shopper.
At McDonald's (MCD.N), discounted meal options this quarter in an otherwise expensive menu failed to draw customers, who responded more strongly to fresh menu items at Yum Brands YUM.N stores such as Taco Bell, KFC and Pizza Hut.
Walmart, TJ Maxx owner TJX and Home Depot all warned this week that shoppers remain "selective" while U.S. retail sales in July logged their first fall in nine months.
"Selectivity is visible in snacks and impulse, where the shopper will still pay up for the one item they came in wanting and skip the second one," said Joel Goldstein, president at Mr. Checkout Distributors.
PRICE CUTS AND PRICEY BRANDS
Companies known for affordable luxury including Tapestry TPR.N , Estee Lauder (EL.N) and Birkenstock BIRK.N reported strong results on demand for apparel, bags, and fragrances priced well above $100. Coffee chain Starbucks (SBUX.O) has managed to recover sales for its pricey lattes as consumers rewarded improved service times and a better store environment.
Catering to both ends of the economy, retailers are combining price cuts with stocking higher-end labels. Target, for example, is expanding its private label food brand Good & Gather while stocking premium items like Bugaboo baby strollers.
It also priced about 95% of its back-to-school supplies around or below last year's levels.
Target as well as Walmart are putting back money received from sizable tariff refunds into lowering prices on pantry staples such as beef, which became costly over the past year, partly due to the import duties.
But discounts have their limits.
"For more stretched consumers, lower prices can only go so far when household budgets are already under pressure. The constraint is increasingly how much disposable income they have left to spend at all," said Axel Rudolph, chief technical analyst at IG Group.
Even Walmart, which raised its annual outlook, said its back-to-school shopping season got off to a good start due to the presence of "more elevated brands" and "more expensive merchandise" that appeal to a broader range of shoppers.
MORE SUPERMARKET TRIPS, LESS SPENDING
One of the clearest signs of consumer caution emerged in basket sizes at Walmart and Target, where shoppers continued to visit stores but spent less per trip.
"Even Walmart, which has been supported by more affluent households trading down, isn't able to keep average spending growth rising," said Angeline Ong, senior investment analyst at IG Group.
The same caution is weighing on home improvement retailers. Home Depot and Lowe's benefited from demand for maintenance and seasonal projects, but higher borrowing costs had consumers continuing to postpone larger renovations that typically require financing.
"The real challenge would be if there's also a decline in traffic," said Brian Jacobsen, chief economic strategist at Annex Wealth Management. "That could happen if there isn't some relief on budgets from higher rates and high gasoline prices."
