It’s a tale of two retailers. On Thursday, one reported robust sales, while the other warned of a potential decline for the year.
The earnings reports this week from Lululemon and Dollar General highlight how inflation and the post-pandemic economy are affecting different income brackets.
Lululemon, known for its high-end athletic wear with leggings priced at $100 or more, saw a 18% revenue increase and an 11% rise in sales for the second quarter. “Our business continues to thrive with new and existing guests, showing no signs of changing consumer behavior,” said Lululemon CEO Calvin McDonald during the company’s earnings call. The company also raised its revenue forecasts for the remainder of 2023.
In contrast, Dollar General, a discount retailer known for its “dollar deals,” revised its sales and profit outlook downward. The company cited weaker consumer spending and rising theft as factors impacting its performance. “Our core customers are expressing financial constraints,” Dollar General CEO Jeff Owen stated on the earnings call.
Retail analyst Neil Saunders from GlobalData noted that Dollar General’s struggles are partly due to lower-income customers feeling the pinch of rising living costs. “The end of temporary pandemic benefits has worsened the situation, leading to reduced spending on non-essentials and indulgences,” Saunders explained.
Despite these challenges, some analysts believe American consumers remain resilient. Brian Nagel of Oppenheimer & Co. observed strong spending trends across various retailers, attributing this to the appeal of innovative brands like Lululemon. “Consumers are still willing to spend on brands that offer new and desirable products,” Nagel noted.
Dollar General isn’t alone in facing reduced spending among budget shoppers. Last month, Dollar Tree’s CEO Richard Dreiling mentioned shifts in consumer behavior after a period of high spending. Walmart CFO John Rainey also reported that customers are focusing more on necessities and lower-priced items. “Consumers are stretching their dollars further and seeking better value,” Rainey said.
Economist Shannon Seery from Wells Fargo pointed out that lower-income households are particularly affected by inflation, given that essentials like food and energy constitute a larger portion of their budgets.
Inflation in the U.S. peaked at over 9% in June 2022 but has since decreased. However, it remains high, with the Personal Consumption Expenditures index showing a 3.3% annual increase in July, above the Federal Reserve’s 2% target. This means the typical American household spent $709 more in July this year compared to July 2021 for the same goods and services.
Despite these inflationary pressures, Nagel believes retail spending has remained relatively stable, supported by a strong labor market. “Consumer spending has held up better than expected,” he said. “We haven’t seen a drastic decline in spending, which is encouraging.”