Lower-income consumers are 'very stretched': Goldman Sachs

"The words we actually heard were steady, choiceful, value-seeking, that's the consumer," Goldman Sachs managing director Kate McShane says about how the US consumer has been described by the retail sector.

McShane sits down with Yahoo Finance senior reporter Brooke DiPalma at the Goldman Sachs Global Retailing Conference to talk about the state of increasingly price-sensitive consumers as they head into the holiday shopping season and the 2024 presidential election in November.

"There is a lot of emphasis on value no matter what strata you are in terms of demographic," McShane states about what she is hearing from industry leaders, but she finds lower-income consumers to still be seeking out better prices.

"When you look at where prices were just a couple of years ago, there's a compounding effect to inflation and those lower-income consumers that don't have a lot of dollars to play with are still very stretched. So, I think they're looking more for price versus the value," McShane says.

Discount retailers Dollar General (DG) and Dollar Tree (DLTR) have faced pressures recently, their respective stocks both diving on their latest earnings results and competition with big box stores.

The way Dollar General explained it to us is that they do cater to a much lower-income consumer, $30,000 and below [is] 60% of their business. That consumer is still shopping with them, but they're very stretched. Their three weakest quarters in the I'm sorry months in the quarter were the last week of each month, which shows that the consumer doesn't have enough money to keep purchasing through the end of the month," McShane tells DiPalma.

McShane goes on to address how home improvement retailers Lowe's (LOW) and Home Depot (HD) are responding to mortgage rates and the US consumer's biggest challenges expected for 2025.

Catch more of Brooke DiPalma's coverage from the 31st Annual Goldman Sachs Global Retailing Conference.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Luke Carberry Mogan.

Video Transcript

Welcome back to Yahoo Finance Live I'm joining You from the Goldman Sachs Global Retailing conference.

I'm joined by Goldman Sachs, US retail analyst.

Keep Shane.

Thanks so much for joining us.

Thanks for having me in a few words.

Break down what we're seeing amongst the US consumer right now.

The words we actually heard were steady choiceful value seeking.

That's the consumer.

And do you think spending will pick up in the later half of 2024 and into 2025?

What are some of the challenges that consumers are still facing?

Well, I think the election is has to be noted as at least at a minimum of distraction.

We've seen that in the past.

Influence sales, I think.

Also, there's five less shopping days this year between Thanksgiving being a little bit later.

Christmas is always on the 25th, but there's five less shopping days, so those are two actually big challenges that retailers face versus maybe last holiday season.

What are you hearing among consumers ahead of the US election about tariffs, So there is one candidate that prefers tariffs more than another.

If there were to be tariffs, I think it would be inflationary for most retailers.

And so in the past, what we've seen from tariffs is that prices go up.

Are you expecting retailers to increase their prices?

What are you hearing?

So no one will really commit because it's only a scenario for right now.

But I think if the any indication from 2018, 2019, we did see prices go up the last time I would imagine we see some price increase this time as well.

I want to hit on what we're hearing from big box retailers.

We heard from Wal Mart do really well with their low price strategy and then following targets results where they lowered prices on 5000 goods.

They seem to do well.

What is the difference right now between value and the actual price of things?

And what values are what are consumed favouring right now?

Is that value play or is it the actual cost of goods?

It's a great question.

I think there is a lot of emphasis on value no matter what strata you are in terms of demographic.

But where I do think its price is the lower income consumer because frankly, prices are still high.

When you look at where prices were just a couple of years ago, there's a compounding effect to inflation.

And those lower income consumers that don't have a lot of to play with are still very stretched.

So I think they're looking more for price versus the value.

We did hear from Dollar General Dollar Tree and it was disappointing results.

Yes, Shouldn't dollar stores do well in this sort of environment?

Why are we seeing this?

Yes, it's it's a little hard to say they should be doing well.

The way Dollar General explained it to us is that they do cater to a much lower income consumer $30,000 and below 60% of their business.

That consumer is still shopping with them, but they are very stretched.

The three weakest quarters in the I'm sorry months in the quarter where the last week of each month, which shows that the consumer doesn't have enough money to keep purchasing through the end of the month.

And so that was a big change from what they saw in the first quarter, and they're not yet seeing that middle income consumer trade down or spend more with them.

and they did introduce that multi tier option.

Do you think that that's not necessarily working in their favour The way that they anticipated?

Well, they still do have a dollar price point.

It's about 20% of their goods that they offer.

Is that a dollar?

So they still convey quite a bit of again value.

And that dollar price point is important to their lower income consumer.

Looking out to the holiday, what sort of environment are we seeing it promotions and value offerings Can we expect more than in years past?

I think what most companies told us over the second quarter and today is that we should maybe expect a little bit more versus last year.

It's going to depend on the retail tailor.

It's going to depend on the category, but we do think again.

The consumer is looking for again value promotions, and we could see a little bit more year over year.

I do want to quickly hit on the home improvement retailer.

It seems like lots is waiting on the potential of an interest rate cut.

What are you hearing from Home Depot from lows that indicates what the back half of the year could look like.

Yes, I think housing turnover has been a real headwind for both Home Depot and Lowes.

And until you do see some unlock and interest rates and mortgage rates come down, that housing turnover number is going to continue to be soft.

And housing turnover isn't necessarily what drives sales at Home Depot lows.

It's actually home price appreciation and private fixed residential investment.

But housing turnover is so depressed that until that unlocks will you see any kind of improvement at Home Depot lows.

Taking a step back?

What are three of the biggest challenges that consumer face right now heading in?

Not only taking consideration the you select the holidays but really looking into 2025.

What do you think will still remain sticky?

That well, I think the good news is is that our outlook is that the labour market is still very strong and you still are seeing wage growth.

So we do expect the consumer to still be employed and still be making more money.

I think also, in addition to that, you do have costs coming off a little bit, and if there were to be rates, cuts you would have less financing obligations as well.

So we just put out a discretionary cash flow analysis that actually shows that consumers should have more cash in 2025 than they did in 24.

But potential headwinds, of course, is the stickiness of inflation and the higher prices, which I do think continues to stretch people's wallet.

K US, retail analyst for Goldman Sachs.

Thank you so much for joining us.

Thank you for having me.