Good luck knowing the consumer this year. Recent consumer confidence reports have been weak, so it is reasonable to assume that the consumer spending background has softened. That’s what Home Depot reported early Tuesday. Earnings were a few pennies higher than expectations, but revenue was light. Same-store sales declined 4.5% versus estimates expected for a decline in the 1% range. The average ticket price increased by 0.2%, but customer transactions (flights) fell by 4.8%. Home Depot cited three issues: lumber shrinkage, unfavorable weather (particularly in California) and “widespread pressures across the business compared to when we reported fourth-quarter results a few months ago.” The company is lowering guidance due to weak lumber prices and weather, and also cites “further softening in demand relative to our expectations, and continued uncertainty about consumer demand.” Atlanta-based HD now forecasts similar sales for the year down 2%-5% (vs. flat prior guidance), and earnings down 7%-13% (vs. prior mid-low single-digit guidance). Let’s make two things clear here. First, the bad weather was widely expected. Secondly, wood shrinkage is a good thing, right? I understand it affects Home Depot’s revenue, but who are we besides? If we’re on the side of the American consumer (me), lower lumber prices are fine, right? That leaves the fuzzy “demand softening”. Chief Financial Officer Richard MacPhail told CNBC’s Courtney Regan that Home Depot has seen continued softness in big-ticket discretionary goods like patio sets, grills, and appliances, but the consumer still has a healthy balance sheet. “Our hypothesis is that this is a result of tightening monetary policy and credit conditions. We believe the medium to long-term fundamentals of home improvement [are] In other words, he told Reagan, it seems some consumers are putting off buying higher-ticket items, but the consumer is still spending. The softer consumer was already expecting it. It’s not like investors don’t believe the “consumer softening” story. Just look at how retailers performed this year. Amazon returns (up 32% this year) The SPDR Retail ETF (XRT), an even-weighted basket of 88 retail stocks, has been flat this year Retail stocks are much more volatile, except for a brief surge during Covid In 2021, we produced In general returns are much lower than the broader market for years. The department of encouragement for retail transformation is remarkably small. “Retail is probably going nowhere this year,” one desperate retail analyst tells me. Not surprisingly, he asked for anonymity, and the main issue: demand is muffled by the shift to services over goods. But it’s more complicated than that. “The average consumer is showing some signs of stress,” the analyst told me. “They’re not done with the effects of inflation, they’ve got a poor tax refund, they’re worried about being employed more than they were last year, their credit card balance is growing and their 401(k) isn’t doing well,” he told me. . The good news: Profit margins may hold up better due to lower inventory levels, and cost reduction will help improve the poor bottom line. Discount They’re Still Winners WalMart appears to be doing just fine, thanks to strong demand for groceries and essentials, and high-income consumers who are “constantly trading,” according to Dana Telsey of the Telsey Advisory Group. That will help offset higher-margin discretionary products like electronics that have shown weakness for some time, Tilsi says. Same with lower priced retailers like TJX, Burlington, and Ross Stores. “Non-price indexes appeared to be more resilient than broader segmentation,” Mark Altschwager of Baird said in a recent note to clients. “The bigger picture, we like it [the] Risk/reward for the group, supported by high inventory availability, cost mitigation, smooth comparisons and share earning potential (as consumers seek value amid inflationary pressures). Inventory levels are “normalizing,” according to John Kiernan at TD Cowen. This is good news, but “it may slow the chances of closing merchandise for retailers who aren’t price-bound, [TJX and Ross Stores],” he says. What’s Hot in Retail: Running Shoes and Coconut Water Looking at the retail winners and losers this year, it’s already hard to get excited about traditional retail, with Big Lots, Gap, Macy’s and Kohl’s all declining. By 20% or more There’s a small group of car salesmen who do a good job, and people sure do a lot of hiking and camping 2023 Retail Winners Group 1 Automotive + 23% Penske Automotive + 22% Boot Barn + 16% Camping World + 16% Other than that, it’s mostly about running shoes and coconut water. Running shoes are hot. There’s a trend of smaller players taking share from established companies in the industry like Nike and Adidas, according to BTIG’s Janine Stichter. Case in point: Deckers ( DECK) has a hot running shoe, Hoka. Deckers is up 23% year-to-date. Case two: On Hold (ONON), which makes trendy ON running shoes, is up 94% year-to-date. It reported earnings Strong this morning, with returns up to 78%, if that doesn’t excite you, how about coconut water? Vita Coco (COCO) stock is up 75% since the start of the year. Bottom line: The American public seems eager to set up camp in the jungle, run around and drink coconut water. It’s too soon for retailers to guide this year While Home Depot has guided, it may be a little more difficult for broader retailers to lower their full-year forecasts at the start of this year. It has to do with the nature of retail, my desperate retail analyst friend told me. “Retailers are very dependent on fourth quarter sales,” Lee said. “They don’t like giving away the year after three months. You can’t tell your suppliers and employees in May, ‘Hey, we’re going to miss the year, Christmas is going to be terrible.'” You have to tell them, ‘It’s early, let’s see what happens with back to school, we still have a chance to do well.’
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