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Macy’s and Costco sound a warning about the economy

<i>Michael M. Santiago/Getty Images</i><br/>Macy's flagship store at Herald Square in New York City is pictured here.
Michael M. Santiago/Getty Images
Macy's flagship store at Herald Square in New York City is pictured here.

By Nathaniel Meyersohn, CNN

New York (CNN) — Macy’s, Costco and other big chains say shoppers are pulling back at their stores and changing what they buy. That could be a red flag for the US economy.

Macy’s (M) on Thursday cut its annual profit and sales forecast after customer demand slowed.

“The US consumer, particularly at Macy’s, pulled back more than we anticipated,” Macy’s CEO Jeff Gennette said on an earnings call Thursday. Customers “reallocated” spending to food, essentials and services, he said.

Gennette said Macy’s would increase its promotions to clear out unsold merchandise.

Same-store sales at Macy’s sank 8.7% last quarter, while higher-end department store Bloomingdale’s dropped 3.9%.

Macy’s stock was flat during early trading Thursday.

It’s the latest retailer to highlight shifts in customer demand.

Costco (COST) finance chief Richard Galanti said last week that some customers were switching from pricier steaks and beef for cheaper meats like pork and chicken. This is a trend that has been common in previous recessions, he said.

Macy’s and Costco appeal to middle- and higher-income shoppers, and their results show a pullback among that demographic.

These shoppers have bought most of the clothing, electronics, furniture and other goods they want over the past three years during the pandemic.

Now, many are shifting their discretionary spending to travel and other services they were not able to find during the pandemic. Strong demand remains for in-person experiences such as travel and dining out. That means big business for leisure and hospitality, as spending is expected to pick up this summer as consumers open up their wallets for memorable experiences.

While some airlines and hotels are posting record bookings, that change in spending is hurting many retailers.

“Macy’s significant earnings guidance reduction underscores the challenges facing retailers given a softening consumer spending environment and shifts in budgets toward services,” said David Silverman, a senior director at Fitch Ratings.

Lower-income shoppers also have less money to spend on discretionary purchases and are slowing down.

Dollar General (DG) said its core lower-income customers were passing up discretionary products like home goods and clothing.

The company slashed its outlook on weak customer demand, sending its stock falling 20% during early trading Thursday.

“The macroeconomic environment is more challenging than the [company] had previously anticipated,” Dollar General said in a statement. It’s “having a significant impact on customers’ spending levels and behaviors.”

Last week, Dollar Tree (DLTR) cut its annual outlook and its stock plunged. The company said shoppers were stocking up on necessities and buying fewer discretionary goods.

Not all retailers are struggling, however.

Some retailers are benefiting from the shift to food and essentials, such as Walmart (WMT).

The company can reach a wide swath of shoppers, and around half of its sales come from groceries and other non-discretionary products. Walmart said wealthier households have been shopping in its stores more frequently.

Beauty retailers have also seen strong sales as shoppers spend on smaller indulgences like makeup and lipstick.

Cosmetics and skincare chains Ulta and Elf are logging surging sales.

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