Yahoo Finance America's retailers have a new challenge: Cooling inflation
Consumer prices in June rose at their slowest pace in more than two years. But a welcome sign for consumers' wallets isn't as straightforward a benefit for US retailers.
With retailers largely achieving growth by raising prices for customers as input costs go up, concerns loom over what happens to companies' revenue as inflation cools.
The answer to that conundrum depends on the retailer and the mix of products it carries, a Goldman Sachs team of analysts covering retail and consumer brands said during a media roundtable on Wednesday.
Wednesday's inflation report showed June prices for food at home grew at their slowest pace since August 2021. In some categories, there was even a decline. Prices for staple food items like eggs and milk are now cheaper than they were a year ago. This will challenge sales at grocery stores that have relied on price increases to drive sales, Goldman analysts said.
"We are in somewhat uncharted territory with how much inflation we've actually seen," Goldman Sachs managing director Kate McShane said. "In fact, if you take a look at the sales growth composition of most of our retailers over the last 18 months, it's been driven by ticket inflation. In fact, units for most retailers have been down."
"What it generally means is you see top lines [sales] start to slow," McShane said.
McShane doesn't expect all companies in the grocery space to take a hit to revenue growth, though. Despite 60% of its business being grocery, Walmart (WMT) is still a top pick from Goldman.
"Walmart has been much more focused on price, so they won't be as impacted as some other retailers when it comes to a less inflationary environment," McShane said. "They also have been getting solid traffic to their stores as they have taken market share."
Target (TGT), which sells some groceries, offers 40% consumable goods and 60% discretionary, per Goldman's analysis. Last quarter, the retailer warned of "softness" in its discretionary business. But the slowdown in price increases could help solve that problem, per McShane.
"I can't help but think that Target is a little excited that this inflation is dissipating because the whole hope is that some of those dollars that get freed up from food go back to discretionary," McShane said. "And for Target, that's huge because the margin in discretionary, especially in apparel and home, [is higher] than it is for food and beverage."
Elsewhere in retail, inflation might be stickier. McShane noted that home improvement goods and auto parts aren't likely to see prices "take a step back."
And suppliers to retailers may continue to raise their prices even as inflation slows. Goldman Sachs managing director Jason English covers companies like Campbell Soup (CPB), General Mills (GIS), and Kraft Heinz (KHC). He noted historical analysis indicates packaged foods prices rarely decline after periods of high inflation.
Josh is a reporter for Yahoo Finance.
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