Slow Consumer Spending is Hurting Retailers

Consumers are returning to their pre-pandemic spending habits and focusing on purchasing essential products instead of stocking up on nearly everything, a shift that could hurt retailers going forward.

Discount retailer Dollar Tree said Thursday that its customers are getting more selective on what they buy, largely narrowing their purchases to food and other necessities. The new spending mix will likely hurt the retailer's profits.

The company raised its full-year forecast for sales, citing improved sales for the second quarter, but tightened its forecast for earnings because of customers' shift toward low-margin goods, such as food or water, and continuing challenges from retail theft.

“While the challenging macro environment continues to pressure our sales mix in both segments, I am pleased with the gains in traffic, new customers and market share,” Dollar Tree CEO Rick Dreiling said during a call with investors to discuss the second quarter earnings report.

Dreiling said on Thursday that Dollar Tree would begin introducing new measures to combat retail theft, including locking up or discontinuing items.

"And it goes [to] everything from moving certain [items] to behind the check stand. It has to do with some cases being locked up,” Drilling said. “And even to the point where we have some stores that can't keep a certain [item] on the shelf just discontinuing the item.” 

Same-store sales at both Dollar Tree and Family Dollar increased during the quarter by 7.8% and 5.8%, respectively, according to the company.

Customer shopping habits at Dollar Tree are part of a growing trend, according to the National Retail Federation. Consumer spending growth slipped year-over-year to 1.6% in this year's second quarter from 4.2% in the first, according to the NRF.

“Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services,” National Retail Federation Chief Economist Jack Kleinhenz said earlier this month. “While job and wage gains have counterbalanced inflation, the stockpile of savings accumulated during the pandemic is dwindling and is no longer providing as much spending power as previously available.”

Both Macy's and Foot Locker reported this week that sales are down, as shoppers skip spending on discretionary items such as beauty products and new shoes. Foot Locker's comparable-store sales dropped around 9.4% during its second quarter and total sales fell 9.9%, compared to the same period in 2022, according to the company.

Macy's saw sales of $5 billion for the second quarter, down 8% year-over-year, as brick-and-mortar sales dropped 8% and digital sales sank by 10% compared to the same time in 2022. The retailer also saw its revenue from other areas of business fall by $84 million. Macy's attributed the decrease to a decline in credit card revenue, which was negatively impacted by increased credit card delinquencies across its portfolio.