U.S. shoppers are getting increasingly hesitant about shelling out for shoes, appliances and other nonessentials. That has more retailers and consumer-goods makers reaching for an old tool to pry open their wallets: promotions.
Whirlpool Corp.’s revenue and earnings took a hit in the most recent quarter from discounts and special sales, which were rare during the pandemic as supply chains struggled to keep up with demand. Petco Health & Wellness Co. said it was using promotions to appeal to customers under rising financial stress. And Foot Locker Inc. told shoppers to expect deals.
“With sales softer than anticipated, we are taking more aggressive actions on promotions to drive demand and manage our inventory to ensure we are best positioned for the upcoming holiday season,” Foot Locker Chief Financial Officer Mike Baughn told analysts and investors last week.
Sellers of discretionary goods cashed in on surging demand during the pandemic, then ramped up prices as inflation soared. Now the tables are turning. For many consumer companies, dangling deals is becoming the cost of engaging bargain-hunting customers as household finances worsen. As of last month, about 30% of U.S. shoppers were buying whatever brand was on promotion, versus just 17% in January, according to surveys from NIQ.
“People have been expecting promotions to be more isolated to the first half and then lower in the back half of the year,” Telsey Advisory Group analyst Cristina Fernández said in an interview. “Now the tone’s different about the back half being a little bit tougher.”
That could bring a measure of relief to penny-pinching shoppers. In the eyes of investors, however, stepped-up promotional activity is adding to the earnings headwinds at retailers, many of which are already contending with declining unit volumes and high levels of theft. One example of the strain on shareholders: Macy’s Inc. posted its biggest weekly share decline in three years after its results suffered from markdowns to clear inventory.
“The second quarter was more promotional than last year as we worked to clear a lot of the seasonal product,” Macy’s CFO Adrian Mitchell said on a conference call. “We leaned into a lot of our strategic and personalized promotions.”
Still, Macy’s had initially anticipated that promotions would be even heavier, Mitchell said. And zooming out to the rest of the industry, it’s not as if desperate retailers are slashing prices right and left. The companies that have loyal customers and strong branding are getting away with very limited price cuts or no promotions at all.
Abercrombie & Fitch Co. lifted its annual sales outlook for the second straight quarter last week and crowed that “we didn’t chase any volume with promotions.” Dick’s Sporting Goods Inc., under pressure after cutting its profit forecast, took pains to emphasize that recent discounts were “surgical” and not a sign of systematically weaker pricing.
“This is not a return to a promotional environment in any way, shape or form,” Lauren Hobart, chief executive officer of the sporting-goods retailer, said on an earnings call.
At a minimum, however, more companies are promotion-curious as the inflation rate slows and price hikes become harder to pass along to increasingly cautious consumers. The trend applies even in categories where sales are still brisk.
Ulta Beauty Inc. said promotions are ticking back up after two years of strong consumer demand, although they’re expected to remain well below 2019 levels. “The promotional environment in 2021 and 2022 was unsustainably low,” Ulta CEO Dave Kimbell told analysts on an earnings call on Aug. 24.
Retailers and brands are becoming more interested in promotions, said Jill Campbell, senior vice president of client partnerships at Ibotta, which works with the likes of Walmart Inc., Aldi and Neutrogena to offer cash back and other discounts. Recently added clients include brands such as Samsung, Weight Watchers and Coleman.
Nike Inc. and Gap Inc.’s Athleta are now offering 8% cash back through Ibotta. Walmart’s warehouse retailer, Sam’s Club, is promoting as much as 7.5% back for shoppers. A particular focus is on deals that get shoppers to return to brick-and-mortar locations, Campbell said. Category wise, deals abound in back-to-school products, sporting goods, toys and pet care.
“There’s a consumer who’s looking for more value, and we’re making sure that we provide it,” Petco CEO Ron Coughlin told analysts in discussing promotions. “It’s really a return to pre-pandemic promotional levels based upon supply by now being more in balance with demand.”
The picture is more complex at mass-market retailers such as Walmart and Target Corp. A year ago, both companies were reeling from inventory surges that forced them to mark down discretionary merchandise such as apparel, patio furniture and kitchen appliances.
Inventories are now under control at both companies, and pricing recovered enough to fuel second-quarter profit gains. At the same time, Walmart said it has more rollbacks – temporary price reductions – in its food department than last year.
The bottom line for shoppers: Expect more deals but don’t hold out for fire sales.
“Instead of panic-promoting, I think the retailers are going to be strategic and say, ‘OK, maybe we have some wiggle room here,’” said Gabriella Santaniello, founder of retail consultant A-Line Partners. “Our customers are under pressure, so if we have a high-margin item, we might be a little more promotional.”
--With assistance from Olivia Rockeman, Jeannette Neumann and Katrina Compoli.
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