STRONG results from the largest retailer and a robust monthly sales report went a long way towards easing worries about the health of the American consumer.
But a slate of Wall Street analysts want more evidence, raising the stakes next week for earnings reports from Target, Macy’s and TJ Maxx owner TJX Cos.
Although headline figures have been robust – Walmart forecasting net sales to grow by as much as 4.75 per cent for the year and US retail sales up 1 per cent – a look under the hood showed some signs that the consumer is not all that fit.
Walmart shoppers are buying necessities and hunting for deals rather than splurging, and the company is growing by taking market share from rivals. What that tells John Zolidis, founder of consumer-focused investment adviser Quo Vadis Capital, is that it is “not really a positive, all-clear signal”.
“If you take the preponderance of data that we’ve seen, all the company commentary, we’re still in a weakening consumer environment,” he said. “And that’s what I expect to be the takeaway from the balance of the retailer reports.”
Consumer spending is the biggest driver of US economic growth, making up two-thirds of it on average, so retail earnings are especially important. Although plenty of companies in the sector have yet to announce results, a slew of other consumer-facing firms have offered a gloomy picture as higher costs have stretched budgets and pandemic savings have faded.
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Restaurant operators McDonald’s and Papa John’s International reported lacklustre quarterly sales as Americans dined out less. Meanwhile, packaged-food makers Hershey and Kraft Heinz cut their revenue projections for the year. And updates from Airbnb and Expedia Group signalled that consumers are getting choosier when booking vacations.
As those reports have rolled in, Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, has been examining not just companies’ bottom lines but how they are reacting to what is happening in their businesses. For instance, McDonald’s introduced a US$5 meal to bump slumping sales. Walmart is another huge barometer, he said.
“Walmart always claimed that they had low prices all the time, and they lowered prices on a lot of things,” said Landsberg. “That, to me, is indicative that Corporate America is seeing that the consumer is slowing.”
Looking ahead, investors will be paying close attention to results from Target, Macy’s and TJX on Wednesday, followed by Best Buy and Dollar General later in the month. There is also the Jackson Hole economic symposium next week, where Federal Reserve chair Jerome Powell is expected to deliver remarks. He has indicated that a rate cut in September is “on the table”, which could help consumers manage their bills.
Cooling inflation is another key factor affecting spending. The most recent Bureau of Labor Statistics figures showed underlying US inflation eased for a fourth month on an annual basis in July.
“All things considered, recent data indicates a still strong but slowing consumer,” said Cayla Seder, macro multi-asset strategist at State Street. “This is consistent with a Fed that is ready to start slowly cutting rates.”
Until then, the outlook is dim for many retail stocks.
DA Davidson analyst Michael Baker reduced his earnings projections for the second-quarter and back half of the year for several companies including Target and Ulta Beauty ahead of results. Retailers are more likely to reduce their guidance for the second part of the year than raise it, he said. In Baker’s view, Walmart is a major winner. Its focus on discounts, combined with better execution, particularly around e-commerce, is helping the company win market share and attract higher-income shoppers.
Dick’s Sporting Goods is another of Baker’s favourite big-box retail stocks, given management has set an appropriately conservative outlook. He also likes BJ’s Wholesale Club, which he says is “executing better today than they ever have”, and it trades at a more compelling valuation than peer Costco Wholesale.
And, even after lowering his projections, Baker sees hope on the horizon since retail stocks typically do well during easing cycles. The S&P Retail Select Industry Index has underperformed the broader market this year, though it notched its best day in nine months Thursday following Walmart’s results and the retail sales report.
“Where we are now, and what earnings have highlighted, is that more consumers are making challenging choices,” State Street’s Seder said. “But spending does not indicate we are at the bottom of the economic cycle yet.” BLOOMBERG
