Hits and misses from Q1 earnings season

0:09Melissa Daniels:Hello and welcome to the Modern Retail Podcast. It's our show that covers the ways the retail industry is changing and modernizing. I'm Special Projects Editor Melissa Daniels. It's been a big week or two for earnings reports with companies like Target, Walmart, Home Depot, TJX and more reporting their first quarter results. We're at this really interesting point where consumer sentiment is hitting all-time lows, and as we recently spoke to Carney's Katie Thomas about, people are still spending. They're just spending differently. So if you're a major public retailer right now, you've got to be laser-focused on finding your consumer, keeping your shopper, and still finding a way to grow.

0:49Melissa Daniels:To help me unpack all this and go over this week's earnings, I'm joined by modern retail reporter Mitchell Parton. Mitchell, how are you doing today? Hey, hi, howdy. I am doing great. How about you? I'm doing great. Thank you so much for making time in your day. How's your Q2 going? Pretty, pretty busy so far. Lots of retail earnings this week, as we'll talk about in a sec. Yeah, you've had a bunch of stories out of earnings this week showing what strategies are working and not working for some of these companies, the challenges they're facing. So let's just get right into it. I want to talk about some of the sort of hits and misses that we're seeing in these earning reports, the things where, you know, companies are hitting it out of the park and the things that are challenging them right now.

1:36Melissa Daniels:So let's start with arguably the biggest win, which is perhaps an unexpected one, and that's Target's earnings. I don't know if I would call it unexpected that they won. I think they've been, we knew they were making changes. I think it was just a question of how impactful it would be on performance and how soon. And it seemingly has been pretty impactful pretty soon. We saw like 7 % increase in net sales, 4.4 % increase in store traffic, they said. So some pretty good stuff in the near term. I think we're going to want to see how this looks a few quarters out. So for anybody not as familiar with Target, Michael Fidelke is their new CEO.

2:23He came in recently to kind of turn around this pretty devastating few years of sales at Target after, you know, there's been things like boycotts. But there's also just been kind of a discretionary spending environment that's not really been in the company's favor. and a lot of operational mistakes, a lot of people would say, from long lines, empty shelves, a lot of things people are seeing in the stores and on the back end as well. So we're in the beginning of this turnaround job, but things are looking good in the immediate term.

3:07Melissa Daniels:Yeah, I think that's a good assessment. I think I saw somewhere that this was, you know, the first quarter in like a while that they had actually posted growth and not declines. Yeah, as far as net sales, it goes, it's been at least a year and a half or so. And I think comp sales, maybe several years. So good numbers for them. Makes Fidelki look really good in the near term. Right. When we talk about how they're doing this, they've talked a lot about having sort of a multi-pillar strategy. You mentioned improving store operations. It sounds like they've done a lot of training with associates and really working on making the in-store experience more pleasant.

3:46Melissa Daniels:They've also just done some big overhauls on merchandising. Curious, when you looked at the earnings this week and listened to the call, what were some of the biggest things that you think are driving growth for them right now? Where are they winning their shopper back? They're focusing in on their assortment. I was in Minneapolis a couple months ago to listen to their kind of pitch on kind of their relaunch, essentially. They're refreshing a lot of their assortment. That's a lot of what they told us, like refreshing a lot of different categories. Focusing on like on-trend products is the big thing.

4:21You see them doing a lot of social media work, a lot of data science there to kind of see what's the most popular thing. And a lot of supply chain work behind the scenes to get that stuff on their shelves. We'll see how effective they are in doing these things and how they're doing that. The other thing that goes along with this is there's been a lot of, I wrote about this, read my story, on how they've been doing a lot of kind of cultural moments, a lot of big launches with different collections. They've done this forever. They've done this for decades. But you're seeing them lead into it. And you're seeing their chief merchandising officer say, we want to do more of these big launches.

5:01uh those being this quarter we had a big uh partnership with roller rabbit which is something we've covered quite a bit which is a big tiktok apparel brand we had park another big tiktok brand you'll see a lot of tiktok brands at target which might be smarter than as well as pokemon on the other side of the other side of the world but you know people flocked to target for pokemon cards they've seen a lot of success uh reportedly on their pokemon partnership pokemon apparel pokemon even pop tarts pokemon like food and beverage like pokemon jackets pokemon everything they've been doing kind of a full a multi-category pokemon thing which is pretty smart because they've been really good on that in kind of the card game aisle kind of bringing that to the rest of the store so they've seen a lot of success in that they say and they want to do more and more and more of that kind of thing throughout the year.

5:57Melissa Daniels:Yeah, it's really smart and it's really fun. You know, we've talked about on this show before about how much we love a collab and what a smart strategy it can be if executed properly. And it just seems like they've gotten a little bit of their mojo back and finding what the trends are and what people want, where, you know, folks are rushing out to get that limited edition, whatever it is. I mean, even last year we saw a glimmer of this. I remember their Kate Spade collaboration did fairly well. I remember seeing some of that sell out. you know, a modern retail podcast veteran guest, Cassie Ho from PopFlex has her blog, Alati's line at Target.

6:30Melissa Daniels:She's brought that back a couple times now. And it's doing well and tends to sell out some lines fairly quickly. So I think we're going to see this being a continued strategy for them. And I think, you know, just assortment, assortment, assortment is what's going to keep them, you know, seeing this growth. Curious, you know, looking ahead, you know, if they came back for this one quarter. It's looking great, but, you know, can they keep this momentum? And CEO Michael Fidelke talked a lot about this on the earnings. He was as hedgy as you would expect a CEO in his position to be, saying, this is great and the work is not done yet.

7:05Melissa Daniels:You know, what will you be looking for a few months down the line when they show their Q2 earnings? Yeah, Q2 earnings, they've been pretty upfront that the sales year over year are probably going to be as rosy, because we had a big Nintendo Switch 2 launch the game console last Q2. So it's pretty hard for them to, you know, it's going to be a hard one to look at the year over years for. But their strategy is long term. And I think investors want to see some consistency and overall growth and returning to profit on kind of a long term basis. So this is not something that anybody thought would be a one-quarter overnight thing.

7:49They're doing a lot of long-term work. None of this stuff is new to Target. It's just kind of doing the same things they've been doing for a long time, like these product collaborations or the same sort of supply chain. They aren't reinventing the wheel. We knew Fidelki wouldn't because he's been on the team for quite a long time. But they're focusing on just, like, operational excellence. they probably said, just focusing on doing the things Target is known for really, really, really well. So that is what they're trying to do. And we'll see if that plays out down the line. I wouldn't expect a killer to Q2, especially with the Switch launch last year.

8:28Melissa Daniels:Well, we'll have to check back in with you come Target Q2 earnings and see if you were appreciate enough on that sales basis. But let's move on to another topic. And this is really a miss for the quarter. And it's one of those misses that I think is affecting companies of all stripes, not just major publicly traded retailers. And that's fuel costs trickling down to companies. You know, the ongoing conflicts around have really disrupted fuel. And we're really seeing that at a consumer level and, of course, a business operations level. And I think Walmart was the clearest this week in spelling out how the fuel costs are affecting them.

9:10Melissa Daniels:They They said that they've absorbed approximately$175 million of operating income growth from higher than plant fuel costs. And that's across their global distribution and fulfillment operations. You actually listened in to the earnings call earlier this week. You know, tell me about how they discussed fuel costs and what this is going to mean for Walmart moving forward. Yeah, so Walmart has a pretty good financial picture, but it was still a bit of a not-so-rosy earnings call in some ways. Because we were talking a lot, they were talking a lot about the fuel costs and the situation in Iran that's coming back into consumers' wallets.

9:52They were talking about how consumers are already pretty squeezed, they're seeing. This stat was actually phenomenal. I'm glad they gave this stat. So Walmart has gas stations, if you don't know this. If you're in New York like me, you might not know Walmart has gas stations, but they do. And they said the average number of gallons consumers filled up with at their gas stations fell below 10 gallons for the first time since 2022. Wow. Really showing some stress on the consumer front. They are watching their gas pumps right now very heavily. And Walmart's seeing that. So that alone is a very eye-opening stat to what Walmart is seeing on the consumer front.

10:37So pressure on household budgets for sure. And that kind of goes down to their entire outlook. You know, things still look good. They still have a good outlook.

10:51Melissa Daniels:They still reported a 7 % year-over-year rise in their revenue. They have operating income growth of 5%. percent. Like to be clear, Walmart is still as dominant as it has been. But I just thought it was really interesting and, you know, chilling in a way for them to be like, hey, this is how much we're absorbing because this is how hard fuel costs are hitting us. And then, like you said, how hard it's going to shift the consumer spending habits as well. Yeah, for sure. And they're talking about how it affects food manufacturing to distribution fulfillment operations, all of that. All of that is affected by what's going on.

11:28And the one interesting thing about Walmart's business lately is how it's becoming more than just a retailer. And they're hoping that things like their membership program and their advertising business are going to – they say it's already couching them from a lot of the impact here on the financial front. It gives them a way higher margin businesses overall that can offset some of the macroeconomic troubles of doing traditional retailing in certain environments. They have their ad business and subscriptions that they can lean on. So that's really interesting. That goes to some of the work we've been doing, tracking some of these other parts of Walmart that keep getting bigger and bigger and are maybe saving them.

12:18Melissa Daniels:Yeah, I believe they reported that the global advertising business is up 37%. I mean, that's massive when you think about how large that is already and how seasoned it is and that it just keeps growing at that rate. And then the membership fee revenue went up 17%. So that's got a healthy clip too. too. When you were listening in on the call, what did they share about what these new higher fuel costs mean moving forward? It sounds like the CFO, John David Rainey, was actually warning, like, hey, we might have to make prices on the shelf higher. Yeah, they're expecting that they might have to raise prices in the next coming months.

12:55And one interesting thing they talked about is how tariff refunds could potentially play into this they were very cautious on this front but you know because everybody's asking on these earnings calls like are you going to try to get refunds what's the status of these things uh or is this even a possible thing and walmart is anticipating that it may be eligible to receive as importer a record less than half of one percent of its u.s annual sales so about like 2.9 billion if you're doing that off of last year's wow uh sales but like you know it's a lot of money for anybody but Walmart. It's a small number compared to all its sales.

13:34It's not even reflecting this. They're not reflecting this in their guidance even. They wanted to focus on the underlying business and their guidance, they said. But their plan for that is to reinvest it into prices if they do get it back. And they said that's the best thing they can do with any dollar of capital right now is to invest in the customer and invest in price, John David Rainey, their CFO said. So it's interesting to see that being their focus. They're obviously worried about prices and are looking for ways to reinvest in that through potentially the refunds.

14:10Melissa Daniels:Yeah, I think that's a really great look ahead for Walmart and just the overall effect of some of these macroeconomic conditions, right? Like, okay, fuel costs are higher. That's going to affect everyone from shoppers to businesses. Things might have to get more expensive. But on the flip side of that, where can Walmart as a company absorb some of that or invest back into the business to keep prices low so shoppers don't cut back or trade down too much? Well, keeping in part with the way that shopper behaviors are affecting public companies, another big hit for me this week that I saw was the TJX earnings and off-price retail in general, which has just been on a tear.

14:54Melissa Daniels:TJX reported its first quarter of 2027 earnings on Wednesday. They've got one of those funky calendars, and that showed that net sales hit$14.3 billion, which is an increase of 9 % over the prior first quarter. Comp sales are up 6%, and they outperformed their expectations. They even increased their full year, fiscal year 27 outlook, seeing comp sales growth of 3 % to 4 % for the full year. I mean, to me, this is just indicative of how much people love a deal, how much people love a value, how much people love a treasure hunt. Are you an off-price shopper at all, Mitchell? Is this an area that you personally or professionally operate in?

15:34I'm not. I'm eager to learn more. I should be. I don't know why I'm not.

15:39Melissa Daniels:I will say, I think what makes TJX and the companies under its banner, you know, TJ Maxx, Marshalls, HomeGoods, what makes them so strong is their assortment, right? And the CEO and President Ernie Herman talked about that on the earnings this week. And he says, you know, between the off-price business model and just the ability that they have to get trending categories and trending items in their stores really fast is such an asset right now. And when you think about shoppers who want value, getting something that is on trend at a good price is really, really compelling. And so they have this going in their advantage.

16:20Melissa Daniels:One thing I didn't realize, they shared this on the call, is that they have 1 ,400 buyers in their system. And that's, you know, for a global store footprint of around 5 ,200 stores. And these buyers are adding thousands of new vendors every year. So if you just think about what is showing up in a Marshalls or a TJ Maxx, it's just constantly refreshing. So you could have a shopper go in there every 72 hours and walk out with 60 bucks or something new. And I just think this is what's going to keep them I'm having a lot of success right now when people are looking to just have a little more value and also still shop and have fun.

16:55Melissa Daniels:You know, we talked about that with Katie Thomas a couple weeks ago, too, that like, you know, people don't want to stifle themselves either. You still want to look good. You still want to feel good. You still want to buy toys for your kid or, you know, freshen up your home with some new fancy throw pillows, which I may have to go to Marshall's and do later. how are how are they operationally thinking about um thinking about getting like this is something we see back at target a lot like there there's a lot of supply chain operations a lot of deal making that has to be done to get those on trend to get the latest things quickly within that off price model that that deal focused um discount model have they talked a bit about um the levers they have to pull to get that trending stuff, get it on time and get it to the stores quickly.

17:48Melissa Daniels:Yeah, Ernie Herman actually talked a little bit about that this week. And he basically said that, you know, they're the first call that their vendors make when they have excess inventory or something to offload. And so having that relationship is huge, because then once you have a relationship with someone, they're coming to you. And so it's just kind of like a cyclical relationship that they have of, okay, we're going to take your stuff and we're going to move it. So having those longstanding relationships is really big for them. And then again, it's just the buyers. It's the buyers scouring for newness.

18:22Melissa Daniels:It was funny when I was listening into this call. He was a bit like, not cagey, but someone had asked, one of the investors had asked, can you tell us what trending categories you're looking at right now? And he's like, no, I cannot. Really? Yeah, because they want to keep it close to the vest, right? And they don't want to give away what they have planned, and they don't want competitors to know that. So they were a bit cagey as far as the specifics of the categories. But what he did say is that they just get super aggressive when something's trending. He actually said that, quote, one of our big advantages is hand to mouth.

18:59Melissa Daniels:We can adjust to strong category performance, and we can back off weaker category performance faster than most other retailers that we know of. So if I'm a target and I'm buying a ton of wholesale inventory and then suddenly it doesn't move, it's not popular for whatever reason, I'm like stuck with that because TJX refreshes so often, they're not going to get stuck with something that's not moving because they're getting it in these like smaller vendor-based batches. It's an interesting model, you know, and it's been around for a long time, but I think in this environment, it's just serving them really well.

19:30So they're a big hit with shoppers right now. What do you think is some of their biggest advantages in the marketplace compared to some of the other players in retail?

19:41Melissa Daniels:That's a good question. You know, when I think about a brick and mortar experience, you want that to be as convenient and efficient as possible. You know, and like nobody likes going to a store and having to wait for an associate to unlock the deodorant. You know what I mean? Like stuff like that is just such a drag. Having to wait in line is a drag. And we're all so short attention spans these days that I think having a really efficient in-store experience is important. And that is something that TJX has leaned into. They have invested in payroll more. I don't have a specific number for you there, but they've been looking to staff up and retain people.

20:24Melissa Daniels:And so when you go to a Marshalls or a TJ Maxx, you rarely will see just one person behind the counter. There will be several folks at the checkout and their checkout lanes will have like seven or eight stations. And they have a light that goes off when that station is ready. So the next customer knows where to walk over to. It's extremely efficient. And I think that makes the shopping experience a lot more pleasant than when you are, say, getting in line at a different big box retailer and having to wait there behind five different people for a long time and put all your stuff on the conveyor belt.

20:56Melissa Daniels:It's just a faster transaction. What are some of the biggest challenges they're facing right now? That's a good point. I mean, I think for any off price, your challenge is going to be do people still have the discretionary income to come in and shop? you know I think they're always going to have that hovering over them because frankly like do I need anything at Marshall's right now probably not like let's be honest but like to that point where I'm like oh gosh I don't have any ankle socks that fit or something like that it might be one of the first places I go to so I think just the overall shopper like demand is something that they should always be cautious of and then again I think back to fuel prices I think If their vendors and the brands that they work with run into situations where they're getting leaner on inventory and they don't have this excess of hot, trendy items to offload anymore, that could be in for a world of hurt.

21:51Melissa Daniels:So to the extent that they are dependent on their brands, that's like an inherent risk of the model. Yeah, it all comes back to supply chain with any retailer. Yeah, great plug for our supply chain newsletter, which you can sign up for at modernretail.co. So, well, let's get into another miss for this quarter of earnings. Again, this is all coming back to the macroeconomic conditions under which we are surviving and trying to thrive. And this is something that, Mitchell, I sort of want to hear your take on. But we are still seeing continued softness in the home category. You know, I feel like this idea of home and DIY being on its heels is just a story we see quarter after quarter.

22:35People have been waiting for a housing market recovery for a little while, like hoping mortgage rates would come down. And then, you know, this is how the cycles go. As a former real estate reporter, rates come down, prices go up, people's values go up and people start buying new homes. It was all that sort of thing. That didn't happen probably a lot because of the Middle East stuff, a lot of the stuff we've already been talking about.

23:03Melissa Daniels:So the economy's tough. People are locking themselves back in again. People aren't going out into the market. And then we start to see the impact on companies. We'll talk about in a second, like Home Depot and Lowe's. Right, yeah. Let's start with Home Depot. My read of their earnings is that it's relatively flat demand. Their comp sales were up 0.4%, which is akin to a rounding error. I guess it's growth, but it's not it's certainly not the six percent that some of the other retailers and other categories are seeing. Right. And President Edward Decker, President and CEO Edward Decker, said that the underlying demand in the business is relatively similar to what they saw throughout the fiscal 2025 year, too.

23:49Melissa Daniels:You know, and to be fair, to be holding stable despite that dip in housing, despite, you know, consumer uncertainty, you know, you have to just think that they're still doing something right and still meeting some demand out there. But it's just a category that I don't think we're going to see big growth out of anytime soon. one interesting quote from cnbc was their finance chief richard mcphail said um said shoppers are engaged up to a certain point anytime we would cover home retailers we talk about how customers have been pulling back on larger projects this has been nothing the last few years uh shoppers aren't doing their decks they aren't doing their roofing project etc etc etc.

24:33They're still not. They're a little worried about the markets still. Unfortunately, they didn't get that magic interest rate that would have helped out with buying houses or buying equipment or paying for some of that work.

24:51Melissa Daniels:Right. And it doesn't seem like it's something that's going to change anytime soon. And, you know, I think this is where you look at some of the other companies that cater to homeowners or even renters, as you've written about, you know, if people aren't doing a deck or doing a roof, maybe they're buying a new area rug for their patio. Maybe they're replacing some lighting. I think it just becomes smaller projects and smaller upgrades. You know, to that end, Wayfair's most recent earnings show that they had 7 % growth in Q1. And, you know, that's a retailer that I think prides itself on affordability and convenience and is, you know, going after people who maybe are just doing a small refresh instead of a giant project.