Elena Perova
By Marcus Diaz
The second quarter earnings season saw a notable divergence in spending habits by consumer income cohort.
Inflationary pressures are disproportionately affecting low-income consumers while higher earners remain resilient, judging from 2Q earnings results and forward guidance in the investment-grade credit space. The bifurcation in spending habits is attributable to disparate impacts from elevated food and gas prices. For instance, during its Q2 earnings call, meat packer Tyson Foods (TSN) reported notable consumer trade-downs to cheaper cuts of protein as beef, chicken, and pork prices continue to trend over 25% above their pre-pandemic levels.
Companies exposed to low-income consumers have responded to demand shifts with earnings guidance cuts. Retail companies, which outperformed by a wide margin during the pandemic, are currently marking down inventory within discretionary categories to align with a shift in consumer preferences toward essential categories. Target (TGT) served as a bellwether for the retail space when it slashed its guidance outlook for the second quarter three weeks after reporting its Q1 results highlighting a worse-than-expected decline in demand for apparel, patio furniture, and big-ticket items. Walmart (WMT) soon followed with an earnings pre-announcement and operating profit guidance cuts, citing a major decline in discretionary spending, notably in apparel, throughout the second quarter.
Conversely, companies operating within leisure, premium goods, and luxury categories reported strong earnings results, with raised guidance and positive sales volumes despite significant price increases. Luxury goods retailer Louis Vuitton Moet Hennessy (OTCPK:LVMHF) and premium alcoholic beverage brand Diageo (DEO) reported strong earnings that beat estimates with double-digit price increases and increased volumes. Both companies noted that consumer demand for their product offerings did not appear to be slowing, and could remain healthy for some time. Meanwhile, hotel franchises Hyatt (H) and Marriott (MAR) reported sharp rebounds in travel spending as Revenue per Available Room tracks ahead of pre-pandemic levels, and Occupancies lagged by less than 10%.
As a result, we expect companies with value offerings to benefit from middle-income cohort trade-downs, while resilient high-income consumer spending should continue to support stable performance within premium segments. Additionally, we believe that companies with middle-income consumer bases could face incremental pressure in an economic slowdown as middle-income consumer preferences shift towards value segments.
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