What We Learned from Target and Other Retail Earnings Reports Wednesday

Consumers are still feeling thrifty, but they may be starting to spend more freely. That was one takeaway from earnings reports from retailer Target (TGT), TJX Companies (TJX), and Macy’s (M) on Wednesday morning. 

Target and TJX were two of the S&P 500’s best-performing stocks Wednesday, rising more than 11% and 5%, respectively, after each topped earnings estimates and pointed to green shoots in the outlook for consumer spending.

The results came after a report last week that showed U.S. retail sales increased by 1% in July, a surprise jump that helped to dispel recession fears that had built up in the wake of disappointing employment data.

Together, the reports had Wall Street feeling optimistic about the health of U.S. consumers on Wednesday. S&P 500 consumer discretionary stocks were up more than 1% early Wednesday afternoon, while the consumer staples sector advanced 0.5% and the S&P 500 as a whole ticked up 0.3%.

Signs of a Discretionary Spending Rebound

Spending on non-essentials like clothing, electronics, and furnishings has been on the decline for more than a year as U.S. consumers, feeling the pinch of elevated inflation and interest rates, have reined in their spending. Though retailer earnings on Wednesday suggested the tide may be turning. 

Target reported same-store sales grew 2% in its fiscal second quarter, its first period of sales growth in more than a year. 

“We also saw improving trends across our discretionary categories, most notably in apparel, and we’re seeing continued strength in beauty,” said CEO Brian Cornell. Apparel sales, which had been declining for a year and a half, returned to growth in the quarter. 

The results echoed those of Target’s largest competitor, Walmart (WMT), which last week reported that “general merchandise” sales grew for the first time in nearly 3 years last quarter. 

Consumers Remain Value-Minded

Consumers may be increasing their discretionary spending, but they aren’t becoming spendthrifts. 

Spending at discount retailers has been growing faster than overall retail spending since July 2022, according to internal credit card data from Bank of America. And that trend continued in the second quarter.  

TJX, the owner of discount stores Marshalls and T.J. Maxx, raised its full-year earnings and sales outlook on Wednesday after reporting a 4% increase in same-store sales last quarter. 

“Our overall comp sales growth was entirely driven by customer transactions, which increased at every division,” said CEO Ernie Herrman in the company’s earnings release.

Target lowered prices on 5,000 food, beverage, and household essentials items last quarter, a decision it said increased traffic and sales volume. 

Stiff competition for price-conscious shoppers has forced retailers across the board to lower prices, which Macy’s on Wednesday said was partly responsible for its decision to lower its full-year sales forecast. 

Macy’s “updated its annual outlook to reflect a more discriminating consumer and heightened promotional environment relative to its prior expectations,” the company said in a press release. 

Shoppers Continue To Spend on Little Luxuries

Perhaps unsurprisingly, demand for luxury goods has dramatically declined as elevated inflation has eaten into earnings and savings. In recent quarters, it has taken another hit from pervasive economic uncertainty. 

“Even the affluent consumer is not spending like they were a year ago,” Macy’s CEO Tony Spring told CNBC on Wednesday. 

And yet consumers are finding room in their squeezed budgets for little luxuries like beauty products, a phenomenon sometimes referred to as the lipstick effect. 

Macy’s cosmetics outlet, Bluemercury, continued to be a rare bright spot for the company. The unit’s same-store sales grew 2% in the second quarter, its 14th consecutive quarter of growth. That stood in stark contrast to the results at Macy’s and luxury chain Bloomingdale’s, where comparable sales declined 3.6% and 1.4%, respectively. 

Even at the Macy’s department store chain, where comparable store sales declined 3.6% in the quarter, management noted “ongoing strength” in the fragrance department.