Consumer spending growth decelerated in the third quarter, with personal consumption expenditures up only +1.5% in Q3, down from Q2’s +1.8% growth pace. In a low-growth consumer spending environment, retailer have to rely on promotional efforts to grab more consumer dollars. But this zero-sum drive for market share where one company’s gain is another’s loss typically drives down margins for everyone.
Looked at this way, Wal-Mart’s sub-par outlook isn’t solely a function of under-pressured household finances, but also reflective of a hyper competitive retail environment where some operators like Amazon (AMZN) are more than willing to sacrifice margins for more sales. Wal-Mart referred to this competitive dynamic in their earnings call, which apparently more than offset the beneficial effects of recent downtrend in gasoline prices.
Next week’s October Retail Sales data will give us a good sense of retail sales momentum at the start of Q4. But irrespective of how the numbers turn out, the market will likely remain happy as long as it assured of continued Fed support.
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