Inflation has a very different impact on consumers: “A bit of a tale of two cities”

The macroeconomic storm is unfolding like the tale of two consumers, if recent earnings reports are any indication.

While various consumer-focused companies pointed to low-end buyer pressures weighing on results, some companies catering to the higher end of the revenue stream indicated that the “premium” focus was the main reason for their resilience.

American Express Co.AXP,
+0.41%
was among the first companies to report results this cycle, and its earnings soared on macroeconomic fears. The credit card giant beat revenue expectations by nearly $1 billion as its executives struck a confident tone about their spending sphere pocket.

Chief Financial Officer Jeff Campbell told MarketWatch that the company saw “no signs of stress from a credit perspective” in its most recent quarter, with spending across all Amex customer groups increasing sequentially. from April to May to June.

And the big reason why? “I would really like to direct you to our premium clientele,” Campbell added. Amex serves consumers, small businesses, and enterprises, with all three categories presenting what Campbell would call a “premium” profile.

Granted, Visa Inc. V,
+1.12%
and Mastercard Inc. MA,
+0.40%
have also shown strong results, and these companies are reaching consumers from all economic backgrounds. But while Visa chief executive Al Kelly said he and his team “have seen no evidence that consumers are cutting back on spending in our markets”, he also suggested on the company’s earnings call. company that some potential behavioral changes advertised by other companies would not. necessarily appear in Visa numbers.

See also: Visa beats profit expectations as CFO sees ‘no evidence of pullback’ in spending

“What we don’t know [is] what level of substitutions are taking place, where people are maybe buying more basic items and less discretionary items, but they are spending at the same level as them, or if, as some retailers have said, people are moving from brands to private labels,” he said.

Visa and Mastercard get general information about transaction amounts, but they don’t know the actual items people are buying. Moreover, the leaders of both companies have indicated in recent months that their companies should benefit from moderate inflation.

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Mastercard’s chief financial officer, Sachin Mehra, meanwhile acknowledged that his company had seen “good strength” among low- and high-income consumers in the United States, although he said there was “a downward trend in terms of growth rate on the low-income side of things. At the same time, “affluent spending continues to be very healthy and is going very nicely,” he told investors.

The benefits of serving high-end consumers returned when Starbucks Corp. SBUX,
-1.32%
results released earlier this week.

“While we are sensitive to the impact of inflation and economic uncertainty on consumers, it is extremely important that you all understand that we are not currently seeing any measurable reduction in customer spending or evidence of lower customer expenses,” said chief executive Howard Schultz. the company’s earnings call. This dynamic reflects, among other things, “the premium nature of our food and beverage offerings.”

However, this is obviously not enough to cater mainly to a high-end clientele. Shake Shack Inc. SHAK,
+1.02%
Executives pointed out that the company’s stores tend to attract more higher-income customers than the typical fast-food establishment, but the company has not been immune to macroeconomic ripples.

“Shack has never been a discount brand,” said general manager Randy Garutti, because it is a “premium brand with premium ingredients.” Nonetheless, low-income customers also visit Shake Shacks, and traffic from this cohort began to decline in June, noted chief financial officer Katherine Fogertey.

Read: Shake Shack tips into a loss and revenue falls below estimates

Various companies including Walmart Inc. WMT,
+0.80%
reported that low-income consumers spend more of their money on essentials. The company cut its profit forecast for the year, acknowledging that it would have to depreciate items like clothing now that customers are spending more of their budget on food and fuel.

Aaron’s Co. Inc. AAN,
-0.15%,
which does retail leasing of items like furniture and electronics, also noted pressures on its low-income clientele.

“With the rising prices of gasoline, food and housing, more of our customers’ income is needed to cover these basic necessities, reducing availability for renting new merchandise or renewing lease agreements,” Aaron’s chief executive, Douglas Lindsay, said.

Speaking of fuel, Murphy USA Inc. MUSA,
-0.29%
Managing Director R. Andrew Clyde mentioned on the gas station operator’s call that its “low-cost strategy” appears to be paying off as low-income customers face higher fuel prices. high and other challenges.

“It’s important to understand that our customers view the products we sell, especially fuel and tobacco, as non-discretionary purchases,” he said. “They’re probably cutting other areas of their monthly spending relative to their spending at Murphy USA, which is going up.”

After revealing that some consumers have become a little slower in paying their phone bills, AT&T Inc. T,
+0.44%
Chief executive John Stankey said there would likely be an “adjustment period” for less affluent customers as they accept higher prices across the economy.

“I hate to describe it that way, but I think we have a bit of a two-city story here, and when you see 9% inflation, it tends to really, really hit those at the bottom. of the market. tough,” he said. “And it’s tough when you walk to the gas pump and you have to fill the car up, and you get the electric bill and you see the kind of increases that people see.”

Then, on the other hand, “you have another segment of the population that has taken in a lot of money during the pandemic,” he continued. “They weren’t traveling. They weren’t having dinner at the restaurant. They felt a little more comfortable and they make different decisions.

Read: AT&T earnings were ‘actually good’ despite selling stocks, analyst says

On the credit side, the boss of OneMain Holdings Inc. OMF,
-0.87%,
which lends to “non-preferred” customers, pointed to an “increase in early defaults for some low credit quality, low FICO customers.” The trend started in May and mainly affected borrowings from the 2021 vintages.

“At the bottom, people are struggling to make ends meet with food, gas, rent, and they obviously don’t have enough cushion there,” said general manager Douglas. Shulman during the earnings call.

Throughout this time, the company’s “higher credit quality customers have performed well in line with our expectations,” he continued.

The divergence between low-end and high-end consumers becomes even clearer when you return to Amex: Chief Executive Stephen Squeri said in the company’s earnings release that “credit performance remains exceptional, with defaults and charge-offs near historic lows.”

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