Last week, we previewed the March Monthly Retail Sales report from the Census Bureau, and our expectations for an improvement in trend from February. This week, Costco reported its March results which were notably stronger month-over-month, thus supportive of our preview. Costco’s U.S. comps accelerated to +7.4% from +4.1% in February, mainly driven by a +190-basis point pick up in traffic to +6.9% (January saw +1.5% growth). Importantly the sales mix “sweetened” with a pick-up in general merchandise sales growth to the low-double-digits from its previous mid-single-digit clip. The Easter shift helped the comp by an estimated +70 basis points and the month cycled a particularly soft period in 2023. April of 2024 will miss Easter, but pick up the full spring with more spring-like weather than last year. Last year, we noted, “April retail sales were softer than the prior months, with the likely culprits being lower year-over-year tax refunds, the decline in consumer confidence, rising uncertainty about one’s job and income, and rising concern about the banking industry, the debt ceiling, and interest rates. Additionally, in-person experiences and travel are still a priority for consumers and food inflation remains persistent, and those combined continue to cut into discretionary spending on goods.”
Unfortunately, not all the news this week was good for retailers; retailers with credit card business may be facing eroding consumer credit, increased loss provisions, and tightening lending standards for customers. For perspective, Macy’s credit revenue is nearly a quarter of the company's EBITDA. Some retailers are higher and others, lower; Kohl’s is higher; Home Depot is lower. Citibank, which provides wholesale credit service (the Retail Services business) for Macy’s, Home Depot, Best Buy, and others reported a significant step up in delinquencies and charge-offs. Recall this hit Macy’s last year (see the chart below where the step up in losses happened in the first half of 2023). As such, this may again be an issue for Macy’s, as well as others. We’ll know when we get their next earnings report.
Source: Citbank First Quarter 2024 Earnings Results Presentation
Citibank's Retail Services also showed a substantial decline (-37% quarter-over-quarter) in new accounts, which likely reflects tighter underwriting standards and that will impact sales for its retailer customers. In this week’s updates from Wells Fargo and JPMorgan, delinquencies and charge-offs were also higher, meaning that is a broader macro thing. During its earnings call, Citibank CFO Mark Mason described the increase in revenue for Retail Services (+18%) as “primarily driven by lower partner payments, due to higher net credit losses”. In other words, the increase was due to a decline in contra-revenue, which is what its partners book as revenue.
As for higher-income households and consumer spending, Citibank CEO Jan Fraser noted, “Healthy spend growth persists in Branded Cards primarily driven by our more affluent customers. Across both portfolios, increased demand for credit continues to drive strong growth in interest-earning balances, and while they are only a small part of our portfolio, we are keeping an eye on the customers in the lower FICO bands.” (This has been her call-out since last fall, so there was no change noted.)
