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Consumer Health Sets Stage for Second-Half 2024 Retail Momentum

Thomas Paulson
Jun 21, 2024
Consumer Health Sets Stage for Second-Half 2024 Retail Momentum

For the first half of 2024, we would characterize overall consumer spending and activity as healthy, with momentum heading into the summer and second half of the year. However, there are a few nuances call out: (1) While the economy, job retention, and household income growth are healthy, consumers are fed up with higher prices on about everything (as we discussed several times in our Top Themes of 2024 rundown a few weeks ago). The consumer is looking for absolute lower prices than last year and the brands offering lower prices are taking visit share. The contrast between a positive economy and negative consumer confidence is fostering confusion and the answer stands on where food prices go. We’re betting on down; (2) Higher inflation in essential services, like auto insurance as well as higher interest expense (credit cards, car payments, etc.), and tighter credit for the less-affluent (restricting and discontinuing credit lines) is leading to further curtailment of discretionary spending by the less-affluent; and (3) Middle- and higher-income households are spending with more balance between “stuff” and “fun,” whereas, less-affluent households are cutting both. 2023 was the peak year for “fun.”

Reflective of less “fun” this year than in 2023 is our nightlife index shown below (which is represents Thursday, Friday, and Saturday night visits with dwell times greater than 1 hour for 23 nightlife districts around the country). 2023 was an ebullient year for “going out on the town.” 2024 is down from 2023 by about -1.3% versus last year. We would expect consumer expenditure on a real basis to be down more as revelers trade down in their cocktails’ providence and choice of protein, and their number of cocktails, glasses of wine, and desserts.

Looking at the second half of 2024, we expect the first-half momentum to carry until at least mid-October. The Presidential election seems likely to be distracting to general commerce; however, Thanksgiving should jolt people back into typical holiday activities and commerce. In addition to the election, this is an unusual holiday because there will be five fewer shopping days between Thanksgiving and Christmas (27 days compared to 32 last year). 2019 was also a shorter season, which we show in the table below. The month of November was suppressed, whereas December was amplified. Like 2023, we expect the 10-day period leading into Christmas to be “robustly amplified.” For the entire period in 2019, general discretionary retail spending (GAFO) grew at a slightly lower rate for November & December combined (-60 basis points) versus the September & October total. By contrast, e-commerce and food service picked up, which makes sense, as did clothing & accessories stores, which doesn’t. Grocery was undisturbed between the two monthly periods.

As to retailers’ financial performance, broadly speaking, first-half results were better-than-planned, with notably strong results from Superstores (Walmart and Costco), specialty apparel (Abercrombie, Gap, Anthropologie, Free People) and off-price (T.J. Maxx, Marshalls, Ross Stores, Citi Trends). As expected, housing-related retailers, dollar stores, and consumer staples retailers had a difficult start to the year. Looking at the second half of the year, an easing of interest rates would help housing-related brands immensely and lower grocery prices would help all. Other second-half tailwinds include improvement on shrink and anniversarying last year’s wage investments and worsening credit trends. Blending all of that with the consumer outlook above implies a widening out of improved financial results for the remainder of the year depending on how deep the deflation in goods becomes. Fingers crossed for all, but general merchandise generally has more wiggle room to lower price while enhancing the merchandise margin (by taking some of the suppliers’ margin). There is less wiggle room with consumables for the retailer, other than vis-a-vis their private label product. As we’ve frequently highlighted, private-label-only grocery Aldi has had an epic period of success over the past three years and its opportunities are expanding.

We recently previewed May monthly retail sales which were reported on Tuesday (this is the same economic statistical report that is shown above). Excluding the noise created by the timing of Easter, general discretionary retail (excluding auto, gas, home improvement, grocery, restaurants, etc.) grew +4.1%, or +20 basis points faster than April. As previewed, furniture (-6.8%), home improvement (-4.3%), and food service (+3.8%) slowed. Electronic shopping (Amazon, Wayfair) has also settled into a lower rate of growth (+7.0%) compared to Q1 2024 (+10.6%). Placer’s measure of Amazon fulfillment center activity also reveals a slowdown, as shown in the graph below. (Of note, our activity read is directional only as Amazon is making substantial changes to their fulfillment services, such as pushing more inventory out of the large FC and into regional sortation centers.)

The slower pace for e-commerce is also the case when comparing to 2019 (+106% versus +113%). Two thoughts on the slowdown: (1) at +100% levels, small deviations can materially move the first digits (in this case from 113% to 106%, or -900 bps), and (2) Amazon is working hard, like Walmart, to show disruptive value for consumers on both first-party and third-party items. As such, we are highly confident that average selling price is down substantially year-over-year, as that is the strategy--win more consideration and wallet share---as it is for Walmart. Obviously having behemoths Amazon and Walmart both pushing prices down on general merchandise, has impact on the overall retail ecosystem and other retailers’ general merchant sales, and that creates notable uncertainty to second-half retail results.

As to the housing-related--including furniture & home furnishings--we see an improving traffic for most brands as shown in the table below (particularly among more value-oriented brands). The same holds for traffic compared to 2019 as well. That said, the recent financial results and commentary from RH and Williams-Sonoma (including Pottery Barn and West Elm) were encouraging and indicates that buyers are showing up. Additionally, the commercial side of their businesses is contributing to dollar sales growth.

This week, La-Z-Boy reported quarterly results through April 27, with sales down only -1% versus the prior year. La-Z-Boy CEO Melinda Whittington noted, “Our execution is the strongest it has ever been, including conversion rates at all-time highs and average ticket and design sales trending up for the year. We expect industry fundamentals to remain volatile for the near term but remain confident in our ability to outperform the market and gain share longer term. Our first quarter is off to a good start, and we are encouraged by our solid Memorial Day results as we believe our assortment and best-in-class motion offerings are resonating with consumers in the marketplace.” They peg their order book at down -3% in an industry that was down -8%. La-Z-Boy CFO Bob Lucian added, “Looking forward, in Fiscal 2025, we expect the industry to continue to be challenged, down by as much as 5%, with any improved industry trends occurring late in our fiscal year, towards calendar 2025, when expected interest rate cuts filter through the economy and begin to positively impact housing activity.”

On execution and the consumer, Whittington commented, “I'm not in a position to make a prediction of when the consumer broadly is feeling a little less pressure. What I did do know is we are seeing the results of where we're playing offense, where we're investing in messaging, where we're investing in having the right products and the right experience for our consumer because there are folks out there that are still buying furniture. And we are fortunate in that, given the quality of our products and what our brand stands for, that we attract a consumer that tends to be a little more in the upper middle-income range. And so they still have a little more discretionary spending. If you can convince them that it's worth it. And I think we're doing a good job of that with everything around our brand and our execution.” These trends and comments support of our assertion that the furniture category has found a floor; La-Z-Boy is working that floor. Aside from interest rates, we expect most furniture-related brands to move up a floor or two in the back half of 2024. Lower interest rates would move them even higher.

Last week, in our piece about the athleisure/yoga apparel category potentially stalling out, we wondered if it was a sign that the high-end was cracking. Several months ago, we introduced our luxury index, which represents visits to all centers including a Louis Vuitton, Saks, and/or a Neiman Marcus store, filtered for visits exceeding 30 minutes in dwell time between the hours of 11:00 AM-9:00 PM (i.e., enough time for the visitor to sample the luxury brands’ providence). For perspective, looking into 2024 at the start of the year, we said that we expected the year to be a better year for prestige luxury in the U.S. as 2023’ significantly more and longer overseas vacations by the most affluent was a headwind to growth, would moderate in 2024. (Again, less “fun”, leaving more for “stuff.”) As the index below shows, luxury visits are up nicely in 2024, which aligns with the recent results and commentary from LVMH and Hermès.

At a luxury conference at the end of May, management teams alluded to strength in the higher-income consumer as driving growth, moreover, their expectation was that Q2 2024 would again show improvement in the U.S. They also shared that consumers were increasingly becoming more selective and wanting to shop key iconic products across brands. (That is why we’ve focused our comments on Louis Vuitton and Hermès as they’ve had the lowest level of aspirational luxury consumption and more limited distribution–being principally direct-to-consumer, inclusive of their own stores. See our last write-up on sector trends here.)

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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