Insights

Publication | BRG

Economic Headwinds Test Retailers

Keith Jelinek, Rick Maicki, Darren Morrison, and Matthew Sgrignari

July 21, 2022

FIVE WAYS COMPANIES CAN MEET THE CHALLENGE

Highest Inflation Since 1981 Points to Ongoing Challenges

BRG Retail and Consumer Performance Improvement professionals continually review key economic indicators and the financial results of over one hundred public companies across retail direct-to-consumer businesses to identify key industry trends and challenges. Following a stronger than expected end to 2021, the Q1-2022 earnings cycle showed the first signs of a meaningful trend reversal in financial results, which might continue through the remainder of 2022. Retailer performance through the rest of 2022 could be characterized by lower earnings and higher costs of capital across all segments.

Results reported for fiscal Q1 clearly reveal key challenges facing retailers. Increased costs—fuel, labor, cost of goods, transportation—continue to challenge companies’ bottom lines. Retailers are facing significant profit erosion driven by macroeconomic headwinds and the unwinding of temporary measures to stabilize businesses over the last twenty-four months.

And consumers? They are still spending, but at what point will they decide it is time to pull back? Rising inflation, driven by fuel prices but prevalent across all key consumer spending categories (e.g., housing, autos, food), has driven consumer sentiment to historical lows.

On the surface, consumer spending has been increasing year over year (YOY), but our analysis indicates that Q1 sales increases in large part have been a result of rising prices and inflation pressures of core goods, not the consumption of more product. Several retail segments—especially key hard goods categories—are starting to see slowing sales as the housing market has dampened. As the United States continues to face a potential recession, consumers are dealing with rising inflation pressures and continuing to pull back on discretionary spending.

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Keith Jelinek

Managing Director

Los Angeles, Century City

Richard Maicki

Managing Director

New York

Darren Morrison

Managing Director

Chicago