By Siddharth Cavale
NEW YORK (Reuters) - With a mixed picture of consumer demand emerging over the past quarter, earnings results from Walmart (NYSE:WMT) and Target on Wednesday and Thursday respectively will shed light on what lies ahead for U.S. retailers ahead of Black Friday.
After a turbulent holiday season last year, when inflation peaked, shoppers' focus on buying essentials like bread, milk and toothpaste, left retailers with lots of unsold clothing and electronics, Wall Street is hoping recent economic data showing food disinflation and higher wages will spur shoppers to open their wallets this season.
But rising credit card debt, depleted pandemic-era savings, and higher interest rates are giving investors pause, betting that retail bellwethers like Walmart and Target will have too much merchandise and be forced to discount during the holiday season.
Walmart's decision so far to not hire seasonal holiday workers is a telling sign, Walmart investor Sizemore Capital Management told Reuters.
"I would interpret that as they're not expecting (shopper)traffic to be super high now," said Charles Sizemore, chief investment officer at the firm, which holds about $2 million shares each in Walmart and Target.
More evidence of Christmas malaise surfaced on Nov. 2 when Target CEO Brian Cornell said that customers were pulling back, even on groceries.
"If people are even picking and choosing what they spend their grocery dollars on, then Christmas is going to be muted this year," Sizemore said.
The National Retail Federation predicts U.S. holiday sales in 2023 to rise at the slowest pace in five years. The holiday shopping season traditionally begins on the day after Thanksgiving - known as Black Friday. But Walmart and Target began offering some holiday discounts as early as October.
Walmart, with its focus on selling groceries, is expected to report a 4.4% rise in third-quarter sales, according to LSEG data. Walmart announced last month that it would offer pre-packaged Thanksgiving meals and ingredients at prices lower than last year. It has also embarked on a $9-billion store remodeling plan.
Target, in contrast, is expected to post a 4.8% sales drop. Nearly half of its sales come from clothing, home goods, toys and electronics, TD Cowen and D.A. Davidson analysts said.
Rubbermaid and Sharpie maker Newell Brands and OXO and Hydro Flask maker Helen of Troy, which both sell products at Walmart and Target, said last month inflation is causing shoppers to focus on food and essentials and that retailers are tightly managing inventories.
Still, Target said it saw shoppers spend more for July 4th and Memorial Day and expects people to also keep that pattern for Black Friday and the days ahead of Christmas. Whereas Walmart's betting on newly remodeled stores, Target is betting on new merchandise, including collaborations with Ulta Beauty (NASDAQ:ULTA), Kendra Scott jewelry and Figmint, a new Target-owned line of kitchenware.
"I don't see" food price inflation crowding out sales of more discretionary goods as "as big of an issue this holiday season as last holiday season," D.A. Davidson analyst Michael Baker said.