Consumers feeling the sting of inflation are cutting back on non-essential purchases, as they face higher interest rates on their mortgages and steep prices for basic necessities such as groceries.
What is emerging in the retail landscape is in many ways a reversal of the trends seen during the COVID-19 pandemic – when supply chains struggled to keep up with surging demand for big-ticket items such as appliances and furniture, as well as for products such as bicycles and outdoor gear to keep people entertained when travel was restricted.
Canadian Tire Corp. Ltd. CTC-A-T -2.47%decrease was just the latest retailer to point to these trends on Thursday, reporting that demand for discretionary products has weakened, and that shoppers have begun to seek out lower-priced essential products.
The company’s credit card data revealed that overall consumer spending has slowed for the first time since 2020, chief executive officer Greg Hicks told analysts on a conference call to discuss first-quarter financial results. And data from Canadian Tire’s loyalty program showed spending declining at stores across all income groups.
“The current high inflation rates have led customers to prioritize essential products over higher-ticket discretionary ones,” Mr. Hicks said on the call, adding that shoppers are “mindful” of their spending as they renew mortgages at higher interest rates, and also return to spending money in areas that declined during the pandemic, such as travel and restaurant dining.
Other companies have noted similar trends. Last month, Whirlpool Corp. WHR-N -0.82%decreasereported a revenue decline as shifting consumer sentiment led to fewer big-ticket appliance purchases.
And United Parcel Service Inc. UPS-N -1.73%decrease reported that it saw buying behaviours change, with discretionary purchases softening as overall U.S. retail sales contracted in March. Food is making up a larger percentage of household budgets and American consumers are directing their disposable income “away from goods to services,” UPS chief executive Carol Tomé told analysts on a call in April to discuss the company’s earnings.
Across the shipping industry, freight rates have fallen and demand for shipping hard goods has dropped sharply in recent months, as inventories climb. Canadian Tire recently exited a dedicated ocean freight contract at a one-time $13.5-million cost, as the company expects to lock in more favourable ocean freight costs in the near future.
Inventory levels in spring and summer products are elevated across the retail industry, TJ Flood, president of Canadian Tire Retail, told analysts on Thursday’s call. Mr. Flood said that promotional intensity is likely to heat up, particularly in discretionary categories.
While purchases of essential items such as pet food and automotive products remained relatively strong in the first quarter, Canadian Tire reported on Thursday that its earnings were affected by changing consumer behaviours, as well as an unusually warm winter and a slow start to spring that contributed to weakened demand for seasonal products.
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Canadian Tire reported its overall revenue declined by 3.4 per cent in the 13 weeks ended April 1, to $3.7-billion.
Comparable sales – an important metric that tracks sales growth not tied to new store openings – fell by 4.8 per cent at Canadian Tire stores. Comparable sales at the company’s Mark’s chain grew by 4.8 per cent, and were up by 3.7 per cent at Sport Chek on higher sales of athletic and casual clothing. Revenue for the Helly Hansen brand grew by 22.9 per cent compared with the prior year.
Revenue in Canadian Tire’s financial services segment grew by 11.5 per cent to $38.1-million.
As weather has turned more favourable following the end of the first quarter, business has improved, with sales up 3 per cent at the end of April, Mr. Flood said.
Canadian Tire reported its net income fell to 42.8-million, or 14 cents a share, in the first quarter, compared with $217.6-million, or $3.05 a share, in the same period last year. The company reported that roughly 87 cents of the hit to its earnings was related to costs from the fire that broke out on March 15 at one of its largest distribution centres in Brampton, Ont. Normalized earnings excluding those costs amounted to $1 per diluted share, which fell short of analysts’ expectations.
The company recorded $67.7-million in costs related to the fire in the quarter – including for cleanup and building repairs – which have not yet been offset by the payout of insurance claims. The company continues to incur costs and expects to recognize insurance recoveries in future quarters.
The retailer lost millions of dollars worth of inventory in the fire, and experienced a roughly $20-million decrease in income because of delayed shipments and disruptions to its supply chain. On Thursday, executives said the facility should return to full operations in the second half of the year. In the meantime, Canadian Tire has been forced to shift important products to other distribution centres and to set up temporary facilities to manage shipments to stores.
