What's in YOUR Wallet?
The Health of the Consumer: Retail Sales, Earnings, and Consumer Savings
GRIT
20 Aug
Hi Everyone đź‘‹,
Consumer strength is giving more mixed signals than your high school crush.
Retail sales were up last week but some flagship retailers reported softer earnings.
This comes as credit card debt hits records, shelter prices soar, and by certain measures, wage growth outpacing inflation.
We also got data from delivery companies that suggest fewer people are hitting the “deliver” button from their couch. After realizing how expensive menu prices + fees have gotten, it’s time to pick stuff up for yourself?
Capital One’s slogan - “What’s in your wallet?” is getting more airtime. This kind of data paints a picture of just how well the individual is fairing throughout the macro rollercoaster we’re currently on.
Helicopter money caused an initial spike in excess savings but Americans can’t let go of their shopping addictions.
Since we got plenty of data last week, let’s take a look at the underlying trends in the consumer.
Retail Sales 👉 Strong Reading Last Week
Retailer Earnings 👉 Home Depot, Target, Walmart
Time for Charts 👉 Credit Cards, Savings Rates, Shelter Costs
Let’s get started!
1. Retail Sales 👉 Strong Reading Last Week
July retail sales came in strong. The value of retail purchases increased 0.7%, beating median estimates of 0.4% after upward revisions in the prior two months.
Source [1]: Bloomberg, US Commerce Department
Keep in mind, Amazon prime day may have skewed the numbers a bit.
Some of this strength is coming from the rebound in real wages. While inflation outstripped wage growth in the aftermath of the pandemic, we are now seeing a strong uptick in real wages.
Source [2]: 22V, BEA, Federal Reserve Bank of Atlanta, FH calculations and estimates
Now onto the boots-on-the-ground component - earnings.
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2. Retailer Earnings 👉 Target, Home Depot, Walmart
Talk about a mixed bag of reporting.
While Target and Home Depot showed growth slowdowns, both were praised for their bottom lines and the stocks traded up.
Walmart however, reported strong results across the board and the stock closed down.
In the background, we have lapping tough comps, student loan payments resuming, and credit card balances reaching all-time highs. Lots to break down here.
Target
Overview:
Target was a major beneficiary of the helicopter money spent over the pandemic. No one could buy experiences so they loaded up on things. However, it looks like this impact continues to wane.
Remember - over 50% of goods Target sells are wants, not needs. YoY sales dropped last quarter (-4.9%) for the first time in four years.
The market reacted positively though to strong gross margins, even in the face of cut H2 profit forecasts. The stock was up 3% on the day.
A concerning trend was also highlighted by Target’s CEO on the call:
“Threats and thefts involving violence at stores jumped 120% in the first five months of the year.” Target said they expect to lose $1.3B due to theft in 2023…YIKES!
Key Graph:
Source: Bloomberg
By the Numbers3
Revenue of $24.7B was 2.1% below street estimates of $24.9B, and down 4.9% YoY.
Gross margin of 28.2% was higher than the previous quarter’s 27.4%, and above the previous year’s 22.6%.
Comparable sales set to decline by mid-single digits (up from low single digits) for the full fiscal year and EPS to range from $7 - $8 (down from $7.75-$8.75).
Home Depot
Home Depot is at the center of another pandemic-related trend as it laps difficult comps - home renovations.
Since you couldn’t go anywhere during the pandemic, might as well spruce up your jail cell (home)!
Home Depot is a similar story as Target, spending on wants vs needs. We have a classic double whammy here for Home Depot: 1) A lot of home improvement spend happened over the pandemic and 2) Higher interest rates are hurting consumer spending.
An interesting note here was the CFO said vendors aren’t coming to HD with as many requests for price increases. This could indicate supply chains are improving.
The company already revised estimates lower last quarter which hurt the stock. Previous guidance was reiterated. This was also the first time in three quarters that HD beat estimates.
The market’s reaction was “meh”. The stock closed up 66bps.
Overview:
Key Graph:
By the Numbers4
Revenue for the quarter was $42.9B, ahead of expectations of $42.1B, but 2% lower than last year’s figure.
EPS of $4.65 was ahead of street estimates of $4.46.
In terms of guidance, HD reiterated its anticipated 2-5% revenue drop in fiscal 2023, while earnings are expected to drop between 7-13%.
Walmart
Overview:
Walmart sells need-to-haves so they fared better.
While Target’s grocery category makes up 20% of revenue, Walmart’s is closer to 50%. Given their product mix, this was a strong quarter on both the revenue and profit side. Higher in-person and online traffic, plus bigger average ticket sizes pushed net income up 53% YoY. Same store sales were up 6.3% vs. 4% expectations.
Key Graph:
Source: @EconomyApp, WMT Quarterly Results
By the Numbers5
Revenue of $161.6B (+6% YoY) beat expectations of $159.7B.
EPS of $1.84 ahead of expectations of $1.70.
WMT also flagged more consumers eating at home (strong performance of kitchen tools), and private label continues to gain share, up 9% YoY.
They also raised full-year guidance for both sales growth (to 4-4.5% from 3.5%) and EPS (to $6.36-6.46 from $6.10-6.20).
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3. Time for Charts 👉 Shelter Costs, Consumer Savings
Housing
These two tweets are the best ways to put it:
How much home a new buyer can afford with a $2,500/month mortgage payment: (way less)
— Michael McDonough (@M_McDonough)
Aug 17, 2023
3 years ago: 30-yr mortgage rate was 2.99% & median existing home price in the US was $294k.
Today: 30-yr mortgage rate is 7.09% & median home price is $410k.
Result: $23k increase in down payment (assuming 20% down) and 122% increase in monthly payment (from $990 to $2,202).
— Charlie Bilello (@charliebilello)
Aug 17, 2023
This is important for consumer spending because an increasing amount of household disposable income is being spent on home ownership vs. goods.
When interest rates rise, those with either variable rates or entering a mortgage now are encouraged to lower the debt portion of their purchase. They divert spending away from discretionary goods and redirect them to paying down debt. When capital is spent on debt vs goods spending, economic growth slows.
However, the reason we are not seeing a massive hit to retail spending yet is the fixed mortgage structure that is prevalent in the United States. Those who locked in mortgages at 4% or below have no problem staying where they are, paying that low rate, and continuing to spend. According to JP Morgan, 75% of US homeowners have mortgage rates of less than 4%. No wonder why inventory levels are low and we have the worst housing affordability conditions in four decades.
Consumer Savings and Household Liquidity
Consumer savings and household liquidity continue to fall. JP Morgan estimates excess savings for US households when adjusting for inflation are now fully exhausted from 2021’s high of $2.1T.
Source[6]: JP Morgan Equity Macro Research
On household liquidity, JP Morgan estimates (adjusted for inflation) the ~$1.4T build up will be fully drained by May’24.
Source[6]: JP Morgan Equity Macro Research
Wrapping Up…
The consumer tug of war continues.
Covid comps have been lapped, supply chains are normalizing, consumer savings have been spent, credit card debt is hitting records and student loan payments start again.
Yet, we still have stubbornly strong growth numbers.
A lot of hedge funds and investors have been caught offside with all the growth numbers we are seeing despite the strong rally in the 10yr.
Will the resilience continue, or does something have to give?
Until next time. Always Yours. Incessantly Chasing ROI.
The author of this newsletter owns ETF’s (exchange traded funds) that may hold ownership interests in the companies discussed in this newsletter as of the published date of this newsletter.
Sources:
1 US Retail Sales Top Forecasts, Showcasing Consumer Resilience: Bloomberg, Reade Pickert (August 15, 2023): https://www.bloomberg.com/news/articles/2023-08-15/us-retail-sales-exceeded-forecast-in-july-after-upward-revisions?sref=1jcHkHmg
2 Growth is Too Strong for Risk Assets: 22V Research, Dennis DeBusschere (August 16, 2023)
3Â Target Investor Relations (Aug 18, 2023): https://corporate.target.com/investors
4 Home Depot Investor Relations (Aug 18, 2023): https://ir.homedepot.com/
5 Walmart Investor Relations (Aug 18, 2023): https://stock.walmart.com/home/default.aspx
[6] JP Morgan US Equity Strategy: Fundamentals Disconnected from Multiple Expansion, Consumer Health Eroding, Corporate Sentiment Insights Using AI / NLP: Dubravko (August 17, 2023)
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