Retail Industry Anticipates Cost Reductions and Slower Sales in the Coming Year

As retailers prepare to release their holiday-quarter earnings reports, they are facing a reality check amid recession fears and changing consumer behavior. Walmart and Home Depot will be among the first retailers to share their results, followed by other big names such as Target, Best Buy, Macy’s, and Gap. However, a slowdown in sales growth is expected after the sharp increases of the past three years, and the end of the pandemic-era shopping spree will bring a mixed picture for investors.

Although companies may share modest sales outlooks, healthier profit margins could be a silver lining as freight costs fall and retailers have less excess merchandise to mark down. Companies may also adopt more cautious spending plans, such as smaller inventory orders and a slowdown in hiring, which could boost profit margins even if consumers do not spend as freely.

Retailers’ strategies have flipped from a year ago when they bet on sky-high sales becoming the new normal and made riskier bets, such as placing bigger orders and paying extra to expedite shipments. This approach hurt companies’ margins as unsold merchandise wound up on clearance racks and costs crept up alongside sales.

Several retailers have already previewed holiday results, and industry-wide holiday results fell below expectations, according to the National Retail Federation. Sales in November and December 2022 grew by 5.3% year over year to $936.3 billion, below the major trade group’s prediction for growth of between 6% and 8% over the prior year. Retail leaders have been looking closely for clues as they gear up for the coming fiscal year, with most retailers’ fiscal years ending in January.

Luxury retailer Neiman Marcus,, Stitch Fix, Wayfair, and Amazon have all recently announced layoffs, while Bed Bath & Beyond, which has warned of a potential bankruptcy filing, has cut its workforce deeper as it also shuts down approximately 150 of its namesake stores. Target has already announced plans to cut up to $3 billion in total costs over the next three years, as it warned of a slower holiday season.

Retail executives anticipate cost-cutting measures for their workforces in the next 12 months, such as hiring temporary workers rather than full-time employees, slowing raises or promotions, and cutting benefits, according to a survey of 300 retail executives in December by consulting firm AlixPartners. Of those surveyed, 19% said layoffs had happened at their companies in the last 12 months, and 19% said they expect layoffs to happen in the next 12 months.

As interest rates rise, retailers may re-evaluate their business practices, including line items such as free shipping and returns, as well as digital marketing expenses. The tight labor market could give consumers the confidence to spend, even as inflation remains hot. People are dressing up and buying fragrances as they go out again, a factor that may have lifted January retail sales along with more spending at bars and restaurants.

The earnings season will bring surprises and show which companies can navigate choppier waters. For instance, Nike raised its outlook after topping Wall Street’s expectations in its most recent quarter, demonstrating the brand’s ability to adapt to changes in consumer behavior. Retailers must similarly be flexible and able to pivot to meet the changing demands of consumers in the coming years.