Inventory Pileup, Uneasy Shoppers Put Retailers in Jeopardy

Best Buy Co.

warned investors last month that shoppers are buying fewer TVs and other electronics as they pay more for gas and groceries.

Macy’s Inc.

CEO

Jeff Gennette

said last week customers across income levels are pulling back on purchases. Days later

Dollar General Corp.

executives said people are trading down to less expensive versions of everyday items, such as powdered detergents, and putting more purchases on credit cards.

Companies are attempting to balance serving consumers who are eager to spend despite rising prices while also being sensitive to shoppers who need or want to be more budget conscious. As a result, retail executives and consultants predict the slowest sales growth in the period between November and January in years.

“The uncertainty moving forward is significant,” said

Erik Nordstrom,

chief executive of department-store chain Nordstrom, on a call with analysts last Tuesday. “There’s cases to be made that things could get better pretty quickly, and then there’s credible cases to be made that it’s going to be tough.”

Recent economic data has muddied the picture of consumer health. Gasoline prices are down from their June peak but are higher than a year ago, and inflation remains near four-decade highs. Unemployment, however, remains low when compared with historic averages and wages are rising.

Consumer spending in July increased at a slower pace than in the previous month, due in part to falling gas prices, according to government data. Yet signs are emerging that people are feeling better about the economy overall, as the University of Michigan’s survey of consumer sentiment showed improvement for the second month in a row.

The tumultuous environment is unlike what retailers have encountered in previous economic slumps and inflationary periods, said

David Bassuk,

a co-leader of the retail practice at the consulting firm AlixPartners. While the 2008 financial crisis was a clear downturn, he said, “this one has pockets of real strength.”

Many retailers banked on big sales and profit growth earlier in the pandemic. People stockpiled items such as toilet paper and other home goods. Others who held back spending early in the health crisis soon bought casual gear and luxury items, bolstered by savings on travel and government stimulus funds.

Rising prices for food, fuel and a host of other goods and services have damped consumer moods. Shoppers are buying, but paying more for fewer goods. They are also giving priority to food and other need-based purchases over patio furniture and gadgets.

Competition for shoppers’ attention and dollars will be fierce later this year, retail executives and consultants say. Categories including sleep wear, men and women’s active wear, and casual sportswear are heavily discounted at many retailers, Macy’s finance chief,

Adrian Mitchell,

told analysts last Tuesday.

Deloitte LLP is likely to predict a slight sales increase for the holidays, largely reflecting higher prices, said

Rod Sides,

global head of the consulting firm’s insights practice. “I think there is a dose of reality coming back” to retailers, he said.

Alex Victor,

of Fort Lauderdale, Fla., said a tighter budget means he won’t replace his dilapidated couch, or buy new clothes, even though his wardrobe has become ill-fitting and outdated. Mr. Victor, 39 years old, who commutes about 30 miles to Miami for his job as a firefighter, said he didn’t buy much during the pandemic and was preparing to refresh his wardrobe when gas and grocery prices shot up.

To save money this Christmas, Mr. Victor said he would hand make gifts using newly learned leather working. “My job is stable and my pay hasn’t changed, but it’s almost as if I feel I’ve gotten a 20% pay cut with gas prices and inflation,” he said.

Consumers surveyed by PricewaterhouseCoopers said they planned to spend slightly less this holiday season than a year ago. The firm predicts that people will spend less on gift giving and more on meals and celebratory events and roughly the same amount on travel compared with last year.

Millennials who responded were an exception, PwC’s

Kelly Pedersen

said. “Many people who have gotten higher pay and salaries are in the millennial group,” he said, and because younger people are more inclined to live in cities, they have been less impacted by higher gas prices.

Shoppers are still spending ahead of the holidays, but often buying fewer items at higher prices and shifting their spending priorities. At Walmart, sales in the latest quarter rose, helped in part by higher prices and slightly more shopper visits, executives said.

Petco Health & Wellness Co.

, which has been riding a wave of pandemic pet adoptions, reported its slowest sales growth since the retailer went public in early 2021.

“People are saying, ‘I might let that collar go, it’s a little frayed and a little dirty, but given gas prices I’ll hold off until my next trip,’ ” said Chief Executive

Ron Coughlin

in an interview. He said the industry saw a similar trend ahead of the recession more than a decade ago, but he expects the situation to be temporary.

Retailers want their current inventory situation to be temporary. Many are rushing to unload products to prepare stores and warehouses for the holidays, but still have work to do.

Walmart, the country’s largest retailer by revenue, will have store inventory in good shape to make room for holiday items but expects some overhang until next fiscal year, said company executives on an earnings call earlier this month. After discounting goods in recent months, Walmart still has around $1.5 billion of inventory it would like to sell, executives said.

Earlier this month

Target Corp.

said net earnings fell 90% in the quarter ended July 30 as it worked to quickly sell excess inventory at a discount. Target expects a further $200 million in expenses related to offloading excess inventory, the company said.

Write to Sarah Nassauer at [email protected] and Sharon Terlep at [email protected]