Retailers could face cost cuts and slower sales this year.

After experiencing a purchasing binge during the epidemic, merchants are ready for a reality check.
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Walmart and Home Depot will start off the retail earnings season with their Christmas quarter reports on Tuesday. Others will follow, including big-box shops like Target and Best Buy and mall mainstays like Macy's and Gap.

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The company reports will be released in the midst of looming economic worries. Americans are currently more concerned about inflation than Covid. Consumers are increasing their spending on dining out, travel, and other services while decreasing their spending on products. Increasing interest rates pose a danger to the housing market.

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After three years of rapid growth, sales will probably see a dip in the next years.

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The end of retail's sugar high presents a mixed picture for investors. A company's sales forecast may be low. But, improved profit margins may be a silver lining as freight costs decline and shops have fewer products to discount. In addition, corporations may have more conservative spending plans, such as fewer inventory purchases and a decrease in hiring. This may increase corporate profits, even if customers spend less freely.

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David Silverman, a retail analyst at Fitch Ratings, stated, "The world is focused on top-line growth." "So many market actors are preoccupied with the nature of revenue itself."

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Yet, he continued, "the operational profit might rebound strongly from a challenging 2022."

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Silverman stated that merchants' methods had shifted in the past year. Then, they gambled that sky-high sales would become the new norm and placed riskier wagers, such as making larger orders and paying more fees to expedite shipments. This negatively impacted firms' profitability since unsold products ended up on discount shelves, and expenditures increased alongside sales.

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A dose of realism over the Christmas season

Retailers have already received a taste of reality. Walmart, Target, and Macy's are among the businesses that have discussed a more cautious customer.

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Numerous shops have already forecast Christmas sales. Macy's cautioned that Christmas quarter sales would fall short of their projections. In November and December, Nordstrom reported decreased sales and increased markdowns, which negatively impacted its financial performance. The sports gear company Lululemon stated that its profit margins would be lower than anticipated due to excess inventories.

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According to the National Retail Federation, industry-wide Christmas sales also fell short of projections. In November and December, sales increased 5.3% year-over-year to $936,3 billion, below the major trade group's forecast of between 6% and 8% growth. The NRF expected expenditure between $942,6 billion and $960,4 billion at the beginning of November.

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Retail executives have scrutinized various indicators in preparation for the upcoming fiscal year. (The fiscal year of most shops ends in January.)

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Jeff Gennette, CEO of Macy's, told Trade Algo last month that fewer Christmas customers were purchasing goods for themselves while shopping for gifts. These smaller purchases, he said, "more than outweighed the good news regarding giving and special occasions."

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However, the company's credit card data showed red flags: Consumers' balances on Macy's, Bloomingdale's, and co-branded American Express credit cards are growing, and more of these amounts are being carried over to the next month rather than being paid off.

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"When we examine our credit portfolio, you have a consumer who is under increasing strain," he added.

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Several retailers have already taken painful steps to prepare for a potentially bad year. Neiman Marcus and Saks.com, the e-commerce division of Saks Fifth Avenue shops, has recently let off employees. Stitch Fix laid off twenty percent of its corporate staff. Wayfair eliminated ten percent of its global employees. Amazon began laying off approximately 18,000 employees, including a large number of retail personnel.

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Bed Bath & Beyond, which has warned of a possible bankruptcy filing, has lately reduced its personnel and closed around 150 of its own locations.

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Target announced in November that it would reduce expenses by up to $3 billion over the next three years, citing a weaker Christmas season. It lacked specifics on this approach. On February 28th, the corporation will release its fourth-quarter results.

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According to a study of 300 retail executives conducted in December by the consulting firm AlixPartners, many retail leaders expect cost-cutting measures for their workforces during the next 12 months, such as recruiting temporary workers instead of full-time staff. 37% anticipate a slowdown in increases or promotions, and 28% anticipate a reduction in perks at their workplaces in the next year.

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Of those surveyed, 19% of individuals polled reported that layoffs occurred at their company over the last year, and 19% anticipate layoffs to occur within the coming year.

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Marie Driscoll, a beauty, luxury, and fashion analyst for the retail consultancy firm Coresight Research, anticipates that firms would scrutinize additional line items, such as free shipping and returns, as well as digital marketing costs.

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If the financing rates increase, she believes that stores will "find their operating religion."

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"Retailers are evaluating their companies and concluding that not all sales are profitable," she added. The reality that money has a real cost is altering how businesses see their operations.

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Nonetheless, she noted that there are still circumstances that favor merchants. The tight job market might inspire people to spend even if inflation continues to be high. Consumers are dressing up and purchasing perfumes before going out, which may have boosted retail sales in January, combined with increased spending at bars and restaurants.

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She stated that the earnings season would offer surprises and reveal which corporations can successfully traverse turbulent waters. After exceeding Wall Street's forecasts in December, Nike, for example, upgraded their outlook.

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"It depends much on their consumer base and brand power," Driscoll explained.  

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