Hi Everyone 👋,

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.

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.

Now onto the boots-on-the-ground component - earnings.

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:

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:

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).

3. Time for Charts 👉 Shelter Costs, Consumer Savings

Housing

These two tweets are the best ways to put it:

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.

On household liquidity, JP Morgan estimates (adjusted for inflation) the ~$1.4T build up will be fully drained by May’24.

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.

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)

3 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)

Grit is a publisher of financial information, not an investment advisor. Grit does not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient. Grit does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN. INVESTORS SHOULD OBTAIN INDIVIDUAL INVESTMENT ADVICE BASED ON THEIR OWN CIRCUMSTANCES BEFORE MAKING AN INVESTMENT DECISION

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

The author, publisher or insiders of the publisher may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and Grit undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

Grit does not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any related social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

Please read: Terms of Use, Privacy Policy, Disclosure Policy and Disclaimer Policy

If you have any questions please contact us at [email protected]