Q: How is consumer weakness reflected in company results, and what impact is it having on overall corporate earnings?
Austin Hawley, CFA
We are seeing some impact from the consumer, and I would describe it as we're seeing evidence that there are certain consumer cohorts that are beginning to struggle to maintain their living standards and they're making very rational adjustments to spending in the face of those budgetary constraints that they are facing. What I'm really talking about here is if you look at the lowest income cohorts amongst consumers, they are facing real challenges today to keep up and allocate their budget the same way that they used to. And if you look at those consumers, they are challenged by consumer durables — like housing, like autos — that are at very high prices, especially when you consider the entire cost of ownership, including interest rates as well as insurance for those high products. And they just simply can't afford those products in a number of cases. And so, for those consumers, what we are seeing happen and it is impacting certain companies and Target is a great example.
And so, I'll talk a little bit about what we saw in Target's earnings recently. Those consumers are spending more of their budgets on necessities and starting to allocate away from some of the more discretionary spend. And Target is a great way to see this because Target has more of a general merchandise and discretionary mix compared to Walmart. And so, when you look at Target's earnings this last quarter, what we saw is some weakness in discretionary categories and some pretty consistent results outside of the more discretionary categories at Target. And that does impact earnings at Target because you tend to have higher gross margins on those discretionary categories. As you get that mix shift, it's a negative on the margin for a company like Target. And so yes, we are seeing some evidence of consumer weakness at the lower income levels.
It is impacting earnings a bit, although I'd say that impact is very modest at this point. And then I'll make one final comment just with regard to the consumer, and that is we are seeing an impact at the lower end, but if you look at the US consumer overall, the US consumer is in awfully good shape. Anyone in the United States who owns their home and is invested in stocks is feeling awfully good, has a really strong balance sheet at this point, and continues to spend in a pretty meaningful way. And so, we really are talking about pockets of the consumer where we've started to see some impacts, but I would characterize the consumer in the US overall as quite strong still.