Some global consumers are showing signs of cracking, as shoppers stressed by record inflation stick to buying basics like food, bleach and cheap burgers, while those who have larger bank accounts buy $3,000 Louis Vuitton handbags.
Investors are watching second-quarter corporate results closely for signs that economies are heading into recession. But so far, consumers are sending mixed signals. There is weakness among those who have been hardest hit by record fuel and food prices. Meanwhile, credit cards and other data show some are still spending on travel and other high-end activities.
Walmart fired a warning shot on Monday, issuing a rare profit warning. Its American customers, who are typically from low-income households, shop for food and other necessities while avoiding aisles filled with clothing and sporting goods.
“The overnight results indicate that the American consumer is now much more focused on the basic element of shopping where we have double-digit food inflation at some of these retailers,” said Nicola Morgan-Brownsell, manager of funds at Legal & General Investment Management.
US consumer confidence fell for a third consecutive month in July amid lingering concerns about rising inflation and rising interest rates.
Sales at luxury group LVMH Moet Hennessy Louis Vuitton SE soared 19% in the second quarter, slightly lower than at the start of the year. Sales of high-end handbags and liquor in Europe and the United States helped offset slowdowns resulting from COVID-19-related lockdowns in China.
And payment processor Visa said cross-border volume jumped 40%, reflecting a boom in summer travel and some consumer resilience.
But slowing consumer demand has hit video game revenue at Xbox maker Microsoft, which saw a 7% decline in Xbox-related revenue and expects further contraction this quarter. Microchip maker Texas Instruments has seen a decline in consumer demand for personal electronics.
BUY, BUT FOR HOW LONG?
Consumer giants Coca Cola Co, McDonald’s Corp and Unilever Plc all said on Tuesday that their products were still selling, even at higher prices.
Unilever, which has 400 brands including Hellmann’s mayonnaise, Knorr bouillon cubes and Domestos bleach, raised its full-year sales forecast after beating underlying first-half sales guidance in raising prices.
So far, consumers are buying, but one wonders how long this can last.
“We see price increases when we go out to shop weekly. The question is: how much more can the consumer accept these price increases? said Ashish Sinha, portfolio manager at Unilever and shareholder of Reckitt, Gabelli.
McDonald’s, which operates nearly 40,000 restaurants, said its global same-store sales jumped nearly 10%, much better than expectations of a 6.5% increase.
Even so, the Chicago-based company said it is considering adding more discounted menu options as soaring inflation, especially in Europe, leads some low-income consumers to “trade in” to less expensive items and to buy fewer large combo meals. , said chief financial officer Kevin Ozan.
Coke’s global sales volumes rose 8% in the second quarter, the company said, driven by growth in both developed and emerging markets, while average selling prices rose about 12%.
“Coke’s results speak to the value of its brand as consumers are unwilling to switch to other colas, despite the price increase,” said CFRA analyst Garrett Nelson.
Germany-based shoemaker Adidas AG cut its profit target for the year due to a slow recovery in its China business.
General Motors Co on Tuesday reaffirmed its full-year profit outlook on an expected increase in demand and said it was restraining spending and hiring ahead of a potential economic slowdown but a 40% drop in net income quarterly disappointed, dragging equities lower.
The Detroit automaker’s drop in net profit reflects supply chain issues, including a global shortage of semiconductor chips that hit hardest in June. Shares of the company fell 3.4%.
Nonetheless, GM is seeing a lot of pent-up demand.
Chief Financial Officer Paul Jacobson said GM still expects high prices and demand for its vehicles.
A GM pickup truck starts at around $31,500 for a base Chevrolet model, while a loaded GMC Sierra can top $100,000. Most models are between $50,000 and $70,000.
“We feel good to catch up on all that (lost) volume in the second half of the year,” he said.