Per Placer traffic as shown below, we expect April to be another good reported month in general for retail sales, but lighter than March, which benefited from the timing of Easter. April faces some goods deflation and the consumer is hunting for bargains (negative mix), as such, average ticket is likely under pressure. We suspect that a major headwind to big-ticket, especially housing-related, is the substantial lift in mortgage and interest rates from the start of the year; the 30-year has gone from 6.6% in January to 7.5% by the second half of April (per Mortgage News Daily). Next to home, the other ultimate big-ticket is auto, and new auto sales, which have already been reported, were up only +2% year-over-year to a 15.8M seasonally adjusted annnual rate (SAAR); a more normalized level would be 16.5-17M. Incentives are now $3.1K per vehicle, up from $1.7K last year, and dealer inventory continues to climb. Used car sales were down -4% in volume and -14% in price. (Financing rates and credit availability are large headwinds for auto.)
Separately and as related to retail overall, as we’ve been reporting, the lower-end consumer is cutting back, so brands with higher exposure to that segment will be less buoyant. The lower-income consumer is facing tighter credit standards and all consumers are facing painful inflation in services essentials – insurance (home, auto, and health), resulting in “budget-minded mindsets.” For middle-income consumers, that inflation is eating into the remaining excess savings that were built up during the pandemic. Which brands have true pricing power will be tested this year, with the result being a large divergence in business and financial results. To better understand these dynamics, we will closely watch retailer earnings reports over the next month.
Citibank CEO Jane Fraser expressed similar sentiments this week during a CNBC interview, reiterating her view that she is seeing a “K-shaped consumer.” Meaning that the affluent continue to spend, while lower-income Americans slowing. See our takeaway of their results. Supportive of this K-view, Synchrony Financial discussed the latest trends that they were seeing is that spend at lower-end consumers was down -5% in Q1 2024, but the higher-end was up +8%. Additionally, their consumer-base shifting from big-ticket purchases, and within categories such as furniture and appliances, they are opting to go for lower-end items. (See our takeaways from credit provider earnings.)
The University of Michigan’s May reading for consumer sentiment was released today and its release read, “Consumer sentiment retreated about 13% this May following three consecutive months of very little change. This 10 index-point decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups. Consumers in western states exhibited a particularly steep drop. While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead.” Historically, we have found the index to be a less useful indicator of consumer spending, however, given the sharp decline, as well as the calls outs on inflation and interest rates, we think that the sentiment indicator bears watching over the coming months.
Source: University of Michigan Survey of Consumers
General Merchandise
Costco led the charge in year-over-year percentage gains which likely reflects an easy compare (+0.9% comps last April) and households seeking value and ways to save money; those households also having money given Costco’s more affluent shopper.
Costco reported traffic (U.S.) at +4.2% vs. +6.9% last month with 100 bps of the deceleration attributable to Easter timing. Merchandise-wise, general merchandise slowed modestly to mid-single-digit growth from low-double-digit growth in March. Interestingly, home furnishings was one category of strength in general merchandise, which supports our view that home-related categories have found a floor and are starting to recover. As it relates to Walmart and Target, we suspect that the step-down reflects what we’ve been writing about – incremental lower spending by less-affluent consumers; as such, we think that sales will outperform traffic on the difference in customer mix. In its earnings call, Hershey said that the Easter category was down for their segment. Finally, next week Walmart reports earnings and traffic for its quarter was +3.0% vs. 1.7% in the prior quarter. The improvement likely reflects increased market share in grocery; see below for our comments on that industry.
Dollar Stores
Similar to the step-down at Walmart and Target, the dollar stores all show a sharp deceleration in April with Dollar General outperforming. The sharp slowdown at Five Below and Dollar Tree points to a cutback on discretionary categories. (Consumables are 80% of the sales mix for Dollar General and Family Dollar.) Looked at over a multi-year basis, the slowdown is also evident. Should the cutback persist, it would imply a worsening of the merchandise mix for all general merchandise retailers. All of this is further supports our view to the reasons behind why 99 Cents Only chose to liquidate which you can read about here.
Grocery
We’ve written a lot about grocery this year and especially Aldi, with the call-out that consumers are seeking to save money which is resulting in an increase in the number of banners shopped and cherry picking promotions. Additionally, grocery is winning share-of-stomach from out-of-home. That said, we are surprised to see a softening at Albertson’s which is also true of its peer set (i.e., it’s macro related). (See our comments above on this week’s earnings reports and on Albertsons recent earnings.)
Furniture & Home Furnishings
Furniture & Home Furnishings is the softest, with The Container Store lagging and Conn’s HomePlus leading. Conn’s is a Texas-based chain with 170 locations in 15 states, selling furniture, appliances, and electronics. Conn’s also owns Badcock & More which is 378 stores, which while traffic is down -3%, is consistently outperforming the category. Both focus on “accessibility” which involves offering credit. Of note, while the year-over-year are supported by deep declines over the past two years (comps down 20% and 10% respectively for 2022 and 2023), they are improving on a five-year basis as well.
Home Improvement
We recently wrote about how smaller market and smaller format home improvement retailers were outperforming. From the earnings results of suppliers to the industry (Masco, Fortune Brands, etc.) we saw an aggregate -3% decline in revenue, in line with Q4 2023’s decline. Lower volumes and prices were also apparent in their results. Said differently, we are “bumping along the bottom.”
Off-Price and Department Stores
The monthly results here match the story above, the less-affluent are curtailing visits. Brands that have a more affluent customer base such as T.J. Maxx, are outperforming. Weekly traffic also shows a strong improvement in the 2H of the month that puts visits momentum back to March’s gains.
As a separate read, Tapestry reported January-March results and the momentum modestly improved from Q4, but sales still declined. CEO Joanne Crevoiserat shared, “Overall, [Coach] brand's marketing and focus on omnichannel experiences helped to drive new customer acquisition, including nearly 800,000 new customers in North America, of which nearly 60% were Gen Z and Millennials. And we've seen gains in unaided brand awareness in the U.S. per our brand tracking work, underscoring that our investments in brand building are working.” That said, management lowered their guidance for the Q2 period due to softer consumer trends in U.S. and China, similar to Kering and other aspirational luxury brands. Crevoiserat, “Overall on North America, it's really a continuation of what we've been seeing in the market. The consumer is being more choiceful despite some positive factors in the market. Certainly, the labor market is a positive in the market. We do see consumer confidence is low in North America, likely impacted by sticky inflation. And so we are seeing an overall more cautious consumer. But in that context, we're seeing innovation continue to win, and Coach has been doing a phenomenal job at delivering innovation.” To conclude, we aren’t “clear” on the aspirational luxury consumer for 2024.
Auto
As we had previewed Carvana reported blow-out results for its quarter demonstrating that consumers are choosing “used with a modernized technology consumer face". Used units were up +19%. Carmax, by contrast, was roughly flat, but with the business stabilizing after a rough 2023 for the company and industry. (For April, used volume declined 4% year-over-year). In terms of new for the month of April, hybrid sales were up +17%, but battery electric vehicles (BEV) were up only 2% year-over-year, thus matching overall growth and far less than last year’s +54% growth; Tesla is estimated to be down -14%, others up +43%; for example, the Ford Mustang Mach-E was up over 200% as it slashed prices (-$8K at the end of February). BMW, which competes with Tesla for buyers was up 18%, as does Volvo (+60%).
