One small update on Wednesday from Best Buy told us a lot about the health of US retailing in the US – it is weakening and the problems are not just confined to the giant Walmart.
After Walmart’s shock profit warning earlier this week, it is clear that US household spending is starting to reflect the ravages of 9.1% inflation in ways that many US investors and analysts are only now just discovering.
The weak June quarter GDP figures for the US (a contraction of 0.2% quarter on quarter and a 0.9% annual rate of contraction) were generated in part by weakening consumer spending and lower sales of durable and non-durable goods.
Best Buy might a fraction of the size of the mighty Walmart but it is the biggest retailer of all things electronic in the US and there is nothing more discretionary than the next big screen TV or PVR.
Wednesday it told the market that it is seeing falling sales in what was the second downgrade from the company this year.
Best Buy said it is seeing weaker demand for consumer electronics amid rising inflation.
After Walmart sprung a surprise earlier in the week with news of weakening profit margins as customers pull back from discretionary buying, Best Buy confirms the trend is on.
Walmart said that it could be looking at a fall in earnings of up 11% if the weakness continues.
Now Best Buy, America’s biggest consumer electronics retailer is seeing something similar.
The retailer now expecting same-store sales to fall about 13% for the second quarter which ends on July 31.
That’s lower than it said in May after its first quarter results, when it predicted it would be roughly in line with the first quarter when sales fell 8%.
CEO Corie Barry said the company expected sales to slow as it laps a period of unusually high demand, but she said the economic backdrop has become more challenging.
“As high inflation has continued and consumer sentiment has deteriorated, customer demand within the consumer electronics industry has softened even further, leading to Q2 financial results below the expectations we shared in May,” she said in a news release.
She though added that its sales are higher than before the pandemic.
But the company’s chief financial officer, Matt Bilunas forecast a weakening on profit margins in the rest of the year.
“Our current planning assumptions for fiscal 2023 include a comparable sales decline in a range around 11% and a non-GAAP operating income rate of approximately 4%,” he said in the statement.
“This compares to our previous guidance of a comparable sales decline of 3% to 6% and a non-GAAP operating income rate of 5.2% to 5.4%.”
In other words, the company sees a sharp contract in margins – he also warned of “additional gross profit rate pressure from increased promotional activity in the consumer electronics industry.”
Now, judging by the 2021-22 brief sales and earnings results from JB Hi Fi earlier this month, the woes hitting Best Buy in the US (and Walmart for that matter) haven’t emerged in Australia yet.
But JB Hi Fi didn’t give any update on the performance in early July and said a fuller update for the first few weeks of the new financial year would be given with the full annual results in mid August. We should have a clearer picture then.
Likewise, Myer produced a solid set of preliminary figures for 2021-22 with sales up around 8% thanks to a big rise in online sales (up 34% over the full year to July).
The June retail sales data out Thursday from the Australian Bureau of Statistics showed what could be early signs with some weakness in some areas – department stores for example, other retailing and household goods – both of which saw weak performances in the month.
The US retail sector is clearly feeling the heat much earlier than we are here and none more than Walmart.
Walmart had previously said that it expected its full-year profit to fall by just 1% this year – now it could be double digit which could be more than $US1.5 billion if the drop is sustained.
“The increasing levels of food and fuel inflation are affecting how customers spend,” its chief executive Doug McMillon said in this week’s statement.
He added that the retailer planned to cut the prices of clothing as it was “anticipating more pressure on general merchandise in the back half” of this year.
So lots of clearance sales, specials to not only clear excess stocks but also cut working capital whose cost is rising as the Fed boosts interest rates. Both will put added pressure on profit margins.
