By Marcus Diaz
The second quarter earnings season saw a notable divergence in spending habits by consumer income cohort.
Inflationary pressures disproportionately affect low-income consumers while high-incomes remain resilient, judging by 2Q results and forecasts in the premium credit space. The bifurcation of consumption patterns is attributable to the disparate impacts of high food and gasoline prices. For example, in its second-quarter earnings call, meatpacker Tyson Foods (TSN) reported notable declines in consumer trade toward cheaper protein cuts as prices for beef, chicken and pork continue to rise more than 25% from pre-pandemic levels.
Companies exposed to low-income consumers responded to changes in demand with cuts to earnings forecasts. Retail companies, which have largely outperformed during the pandemic, are currently reducing inventory in discretionary categories to align with a shift in consumer preferences towards essential categories. Target (TGT) served as a guide for the retail space when it cut its guidance outlook for the second quarter three weeks after reporting its first quarter results highlighting a worse than expected drop in the demand for clothing, patio furniture and big ticket items. . Walmart (WMT) quickly followed with a pre-earnings announcement and operating profit forecast cuts, citing a major drop in discretionary spending, notably in apparel, throughout the second quarter.
Conversely, companies operating in the leisure, high-end goods and luxury categories performed strongly, with higher forecasts and positive sales volumes despite significant price increases. Luxury goods retailer Louis Vuitton Moet Hennessy (OTCPK: LVMHF) and premium liquor brand Diageo (DEO) reported strong earnings that beat estimates with double-digit price increases and rising volumes. Both companies noted that consumer demand for their product offerings did not appear to be slowing down and could remain healthy for some time. Meanwhile, hotel franchises Hyatt (H) and Marriott (MAR) saw strong rebounds in travel spending as revenue per available room tops pre-pandemic levels and occupancies lag less than 10%.
As a result, we expect companies with value offerings to benefit from declines in trading from middle-income cohorts, while resilient high-income consumer spending should continue to support a steady performance in high-end segments. Additionally, we believe companies with middle-income consumer bases could face additional pressure in the event of an economic downturn as middle-income consumer preferences shift toward value segments.
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