A couple of weeks ago, we wrote about the credit card trends of JP Morgan, Citibank, and others which pointed to solid trends for affluent households and worsening trends for the less affluent. The rising credit deterioration would also curtail credit to the less affluent, limiting their spending, and hit the profits of retailers with credit exposure (i.e. it's a double whammy and its one of the slow-moving transmitting effects of the Fed’s tight monitory policy). This week brought the Q1 2024 results from Capital One and Synchrony which is a clearer look into credit trends for the less affluent, (which we also wrote about last quarter.)
Capital One CEO Richard Fairbank shared, “Let me just comment a little bit about the subprime consumer. In the global financial crisis, we observed that credit metrics in subprime moved earlier in both directions. We saw that [with subprime], but then we saw sort of everything move proportionately. In fact, subprime moved frankly, somewhat less proportionately than prime as a multiple, but obviously, all portfolios worsened quite a bit during the global financial crisis in the pandemic. Subprime credit improved more and more quickly than prime but it also began to normalize more quickly, too. And of course, that's in the context of lower income consumers seeing disproportionate benefits of government aid and then unwinding that over time. And subprime is, of course, not synonymous with lower income, although they are somewhat correlated. So on the other hand, if we look at how they have been doing, the income growth from lower-income consumers has been consistently higher over the past several years. Other than the tax refund effect, which does show up more in our lower end part of our customer base than the higher credit end, we have seen the subprime performance be very strong. It just worsened faster. On a proportional basis, everything caught up with it. But it frankly always seems to be a first mover, and it settled out, frankly, started settling out a little bit earlier than the rest of our portfolio. So based on current performance, we feel very good across the credit spectrum. It certainly catches our attention when we see the inflation specter sort of become greater lately. So we have a real eye on that. As you know, we continue to look at the marketplace and trim around the edges and so on...We have, for some time, just been doing some trimming around the edges and just being a little tighter on the credit lines and things like that credit line increases.”
The figures below show the erosion in delinquencies and charge-offs for Synchrony Financial.
Source: Sychrony Q1 2024 Financial Results Presentation
The table below shows spending by vertical, where the biggest swing is Lifestyle which is impacted by Polaris and The Container Store (projects). For Home & Auto, management flagged fewer large ticket purchases (Lowe’s, Floor & Decor, and others), which has been ongoing.
Synchrony CEO Brian Doubles shared “spending in January was impacted by challenging weather conditions as average transaction frequencies declined 4% versus the prior year. In February and March, however, we saw a rebound, particularly in nondiscretionary categories. Overall, consumers focused on more nondiscretionary spend in the quarter and shifted out of certain discretionary categories like home furnishings, travel and entertainment. Synchrony continues to see indications that nonprime borrower spend has slowed, and our portfolio's purchase volume growth continues to be driven by higher credit grade consumers. Average transaction values among super prime borrowers continue to increase. And similarly, we see average transaction frequency growth from our prime and super prime segments...[We are seeing a lot of that spend being driven by the higher end consumer...I think they're benefiting obviously job market, house prices are up, stock prices are up. On the lower end, that's where you're seeing some of the slowdown. Our home specialty business is up in double-digits or our outdoors business is up.”
These characterizations are supported by Placer.ai traffic trends, shown in the chart below. As it relates to home-related, we’d expect smaller ticket (At Home and Mattress Firm) to lead larger ticket (Ashley and Floor & Decor). We see that with this week’s earnings from Ethan Allen where its press release quoted CEO Farooq Kathwari, “We are also seeing incremental consumer interest returning back to the home after being previously diverted to other areas such as travel,” albeit, retail orders were still down -8.6% (versus -9.5% in the year ago period). Also, see our comment on Tractor Supply’s results.
