The latest Q3 retail earnings reports reveal a nuanced story about the strength of consumer spending heading into the holiday season. Consumers continue to feel the pinch at checkout, a trend reflected in the performance of major retailers like Walmart, Target, TJX Companies, and home improvement giants Lowe’s and Home Depot. This shift underscores a growing preference for value and practicality over discretionary spending—a change that has implications for commercial real estate (CRE) and decisions about investment in retail assets.
In a shortened holiday week, the Bureau of Economic Analysis will release the personal-consumption expenditures (PCE) price index for October. Last month, the PCE increased by 0.2% month-over-month, bringing the annual rate to 2.1%, which is close to the Federal Reserve’s 2% target. Since 2020 however, cumulative inflation in the U.S. has risen approximately 21.83%, significantly increasing prices across the board and impacting consumers’ purchasing power. The November PCE will be important as the Fed’s stance on lowering rates further has grown more cautious as widespread concerns about inflationary pressures are boiling under the surface.
Value Takes the Spotlight as Consumers Tighten Their Budgets
Earnings reports from major retailers revealed clear winners and losers, as consumers continue to scale back on discretionary spending. Walmart’s Q3 earnings boomed on the scene, reflecting its appeal to budget-conscious consumers. The world’s largest retailer reported strong growth, with consolidated revenue up 5.5% and U.S. comparable sales increasing by 5.3%, over the same period the year prior. CEO Doug McMillon told investors on the retailer’s earnings call that 75% of their gains in the third quarter came from households earning more than $100,000.
In sharp contrast to Walmart is another retail giant, Target, that missed both Wall Street revenue and earnings per share estimates, citing “multiple cost pressures” and a “deceleration in discretionary demand.” The weaker-than-expected report, spanning the back-to-school and Halloween shopping periods, raises concerns about potential challenges for the critical holiday season. In response to the weak Q3 results, Target lowered its guidance for the full-year profit outlook, expecting flat comps for Q4.
On the heels of Target’s rather dismal reporting, TJX demonstrated resilience, thanks to its bargain-hunting business model that appeals to budget-conscious consumers but may have been eclipsed by its cautious outlook. While the company reported strong third quarter growth, with a 6% rise in year-over-year revenue reaching $14.06 billion, the retailer’s projections for the fourth quarter underwhelmed Wall Street, causing the stock to decline by 1% to $118.34 in premarket trading less than 24 hours after its earnings release.
A peek into Q3 earnings from home improvement giants, Home Depot and Lowe’s, offers similar insights into consumer behavior. Both retailers performed better than expected thanks in part to hurricane-related sales. Home Depot reported a 6.65% year-over-year revenue increase to $40.2 billion, with comparable sales declining only 1.2%, better than analysts’ expected 3.3% drop. CFO Richard McPhail noted on their earnings call that approximately $200 million in sales was tied to hurricanes Helene and Milton. Meanwhile, Lowe’s saw revenue growth and raised its full-year guidance, despite facing a 4.6% post-earnings stock drop. Both companies expressed caution as they navigate challenges in the home improvement market, noting the hesitancy of DIY consumers to commit to big-ticket projects. However, spending on smaller items remains solid, driven by strong performance in online sales and e-commerce platforms.
Trouble Ahead? Tariffs, Credit Card Rates, and Delinquencies?
Proposed tariffs under President-elect Donald Trump are raising concerns about rising potential inflationary impacts on prices for a variety of imported consumer goods. Walmart CFO John Rainey warned that price hikes are likely if a 60% tax on Chinese imports and 10%-20% tariffs on other imports are implemented. Similarly, Lowe’s CFO Brandon Sink noted that approximately 40% of its goods are sourced from outside the U.S., which could lead to higher product costs.
Due to TJX’s off-price retail model, CEO Ernie Herrman said he does not expect tariffs on Chinese imports to have a meaningful impact on the business in 2025 as they will maintain their “value gap.” However, deep discounters like Dollar Tree and Five Below face greater challenges due to their fixed-price models and reliance on products manufactured in China.
It is important to note that this discussion of tariffs centers on proposed terms, and it is possible that the tough talk is more of a “negotiating ploy and that what is finally implemented will be relatively modest in scope,” said GlobalData managing director Neil Saunders.
Consumer debt data also reveals potential trouble ahead. According to a report from the Federal Reserve Bank of New York, credit card debt has hit a record $1.17 trillion, with delinquencies rising to levels not seen since 2011. The average interest rate on credit cards from major U.S. retailers has surged to over 30%—an all-time high—up from just over 24% in 2021, according to personal finance site Bankrate. At least 50 of the largest U.S. retailers raised interest rates on their store credit cards before the Federal Reserve began cutting rates, protecting their profit margins. Big Lots, Gap, Petco, Macy’s, and Nordstrom are among those that increased APRs on store cards between September 2023 and September 2024.
Growth and Contractions in Retail Footprints
Earnings from major retailers provide an important early indicator of which players aim to expand their store footprints and others likely to contract. TJX Companies, operating over 5,000 stores, sees continued growth potential with plans to open more than 1,200 new locations under its existing retail banners across current markets. This optimistic outlook is fueled by its off-price business model, a strategy positioning the company well for expansion even amid potential cost hikes from tariffs.
Other retailers, however, are recalibrating their strategies. Advance Auto Parts is focusing on streamlining operations by closing 523 corporate stores and exiting 204 independent locations. These closures, part of a multi-year plan, reflect a broader trend of retailers reevaluating footprints and consolidating assets to improve profitability. The company, having already informed investors of plans to raise prices to offset additional costs from proposed tariffs, also intends to open 60 new locations by 2027, signaling a cautiously optimistic approach to store expansions given market uncertainty.
Similarly, Chipotle is accelerating its expansion, particularly through its Chipotlane drive-thru concept. The fast-casual chain plans to open 345 locations in the coming year, with at least 80% featuring Chipotlanes. This growth underscores a shift in consumer preferences toward more convenient dining options, likely influencing the demand for CRE spaces designed to meet these needs.
In another significant move, Blackstone’s acquisition of an $8 billion stake in Jersey Mike’s Subs will help accelerate the sandwich chain’s growth, including its first international expansion into Canada and continued U.S. expansion. Having opened over 1,000 stores in just five years, Jersey Mike’s exemplifies how aggressive growth strategies in the restaurant sector are reshaping the CRE market, driving demand for prime retail locations.
Has Black Friday Changed to Orange Friday?
The 2024 holiday season is shaping up to be unique as it features the shortest shopping window between Black Friday and Christmas in five years. Despite the compressed timeframe, sales are expected to grow. Holiday shopping seems to start earlier each year, with 32% of U.S. consumers planning to start “between July and October,” according to a recent Gartner survey.
Retailers are embracing the early shopping trend, with Amazon reviving its annual beauty sale, Walmart rolling out extensive deal days through Cyber Monday, and Target launching an early Black Friday event.
The National Retail Federation projects November and December retail sales to increase by 2.5%-3.5%, reaching up to $989 billion. While 14% of those surveyed said they plan to spend more on holiday shopping this year the majority—64%—intend to maintain their prior spending level, while 21% plan to reduce their spending.
Notably, Macy’s is making headlines this week for more than just the holiday season. While the 98th annual parade, widely seen as the symbolic kickoff to holiday shopping, is just four days away, the company faces another major story. Macy’s has delayed its Q3 earnings release due to an accounting investigation, which alleges that an employee concealed up to $154 million in expenses over several years.
With the holiday spending season officially underway, retail spending reports for November and December will be a critical barometer for the broader economy and will also inform Fed decisions about further interest rate cuts. With value-focused retailers leading the charge and new opportunities emerging from store closures, the coming months are poised to shape the future of retail real estate.
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