Shopping in stores is back and thriving. Here's why

New York(CNN Business) The Covid-19 pandemic was expected to turn us all into permanent online shoppers, never to set foot in physical stores again.

Instead, consumers have apparently gotten tired of ordering everything while sitting on the couch and have returned to shopping the old-fashioned way.

"As the pandemic has subsided, you're seeing consumers get back to their pre-pandemic activities," said Brian Nagel, who covers the retail sector at Oppenheimer & Co. "Consumers see benefits to shopping in stores."

Several factors are converging to dampen online sales growth, he said.

Inflation is pressuring consumers' wallets. This has led some shoppers to forgo buying big-ticket discretionary items like electronics and furniture — products often purchased online — or balk at delivery fees.

Other consumers have proven eager to get out and socialize after being cooped up at home during the pandemic.

"Shopping in stores is a social activity," Nagel said.

The signs of this shift in consumer preferences are everywhere.

In May, online retail sales increased 2.2% compared with the same month a year prior, according to payment data released by Mastercard Tuesday. In-store sales grew at a much faster clip of 13.4%.

E-commerce stocks have been the worst-performing retail sector on the S&P 500 so far in 2022, declining 28% as of Monday, according to S&P Global.

Amazon (AMZN) said it added too much warehouse capacity as it raced to meet pandemic demand and was overstaffed in some cases. The company is now reportedly subletting some warehouse space to reduce excess capacity.

Companies such as Stitch Fix (SFIX) are struggling. The online clothing styling service will lay off 15% of its salaried positions — around 330 workers — amid slowing e-commerce growth. The cuts come months after Stitch Fix slashed its forecast for the full year and said its active client count was below expectations.

Carvana (CVNA), the online used car dealer, will lay off about 2,500 employees, or 12% of its workforce. In cities, several startups that promised to replace corner groceries by delivering food and essentials in under 15 minutes are going belly-up.

More layoffs are likely on the way, experts predict.

"A lot of these companies staffed up in anticipation of forecasted growth," said Berna Barshay, an analyst at Empire Financial Research. "Now they will fall short of those forecasts. The obvious answer to missed growth targets is to scale down, pare back and reduce costs."

Reversal of 2020

The trend is a sharp reversal of the rush to online ordering during the early phases of the pandemic. That has upended predictions that the consumer shift to online purchasing would be permanent.

Two years ago, when Covid-19 brought everyday life to a standstill, online purchases surged.

With nonessential stores closed and shelter-at-home orders in place, shoppers of all ages bought groceries, home office supplies, furniture, sports equipment and other goods online in record numbers — some for the first time.

During the second quarter of 2020, e-commerce sales as a percentage of total retail sales shot up more than four percentage points to 16.4%.

Companies staffed up to meet demand, expanded their distribution facilities and struck partnerships with delivery services such as Instacart and DoorDash.

But as businesses reopened in the summer and fall of 2020, a reversal began taking place. Consumers dashed out to hit malls, spruce up their wardrobes and make long-awaited purchases.

Online sales still make up a greater portion of retail sales than they did prior to the pandemic. But they have steadily declined from their peak in the spring of 2020.

Top companies say they're noticing more shoppers returning stores.

"We saw a notable shift in consumer shopping behavior between channels, with better-than-expected sales in stores and lower-than-expected digital sales," Macy's (M) CEO Jeffrey Gennette said last month on a call with analysts.

Gennette said customers were coming into stores to purchase formal clothing such as dresses to wear to parties and social events. At the same time, they have pulled back on buying casual clothing online.

Niraj Shah, CEO of online furniture retailer Wayfair (W), told analysts last month that the "pendulum" had swung back to shopping in person after a spike in online purchases in 2020.