As previewed, December retail sales per the Census Bureau increased at a very robust rate of +5.6% year-over-year, +250 basis points stronger than the year-to-date rate of +3.2%. Excluding auto and gas sales, the increase was even higher at +5.8% versus the year-to-date trend of +4.9%. Electronics retailers increased an incredible +10.7%, gaining on spectacular November (+10.0%) versus a prior trend of flat (something we also noted during our recent analysis on Best Buy). Clothing & Accessories stores also saw a solid +4.3% increase. Other categories of retail were more-or-less in-line with their November rates–restaurants & bars (+11.1%), nonstore (+9.7%), grocery (+0.9%), sporting goods (+0.9%), home improvement (-2.3%), and furniture & home (-4.7%). This segment momentum is also similar to what we reported last week (i.e., no major surprises).
Adding to the above, in our holiday preview, we also wrote that prestige luxury was also likely to have a better season after a soft 2023 (when the affluent were off on international vacations.) That preview looks to have been on the mark with Richemont (parent company for Cartier, Van Cleef & Arpels, and others) reporting strong holiday sales for the U.S. region. Year-over-year growth accelerated to +8% from +4%, with the company calling out a resilient economy and repatriation of spend (namely from Europe) driving the inflection. Category- and channel-wise, jewelry and retail lead, posting double-digit growth.
This better trend was also reported on by Neiman Marcus and Saks Fifth Avenue at this month’s ICR Conference, where the two shared that December results had shown improvement from their prior trend and that the affluent customer was spending. When describing the U.S. luxury market, Saks CEO Marc Metrick shared that in his view, luxury is now a structurally larger market (compared to pre-pandemic levels) because men had entered the category in “mass.” Contributing to the participation was Pro sports (where players are now highly visible sporting luxury apparel and accessories), as well as more focus on men by the brands which developed during the pandemic (a time where the brands needed to expand their storytelling as retail was closed). This is an interesting development that creates the opportunity for new retail storytelling and connecting (co-marketing and -merchandising.) We see all these well represented by Louis Vuitton’s new Creative Director Pharrell Williams' debut collection leveraging LeBron James.
Beige Book: Encouraging Whispers to the Fed
The Fed’s January Beige Book, one of the more influential reports on the FOMC’s decisions, reported consistent economic growth in Districts and read, “Consumers delivered some seasonal relief over the holidays by meeting expectations in most Districts and by exceeding expectations in three Districts, including in New York, which noted strong holiday spending on apparel, toys, and sporting goods...Several Districts noted increased leisure travel, and a tourism contact described New York City as bustling...Overall, most Districts indicated that expectations of their firms for future growth were positive, had improved, or both...Nearly all Districts cited one or more signs of a cooling labor market, such as larger applicant pools, lower turnover rates, more selective hiring by firms, and easing wage pressures...Firms from many Districts expected wage pressures to ease and wage growth to fall further over the next year.”
The Minneapolis District reported, “A retail industry contact in Minnesota said this year’s holiday season exceeded expectations for many and “felt very much like a pre-pandemic holiday season.” A Minnesota mall contact said December traffic was about 15% higher than last year, with some days exceeding pre-pandemic levels. Sales at movie theatres, restaurants, and other food retailers were reportedly strong.”
The Cleveland District reported, “One large general merchandiser said that lower-income households had become more reliant on credit cards and “buy now, pay later” payment options in recent months and was skeptical that these customers could sustain their current level of spending once seasonal promotions ended.” In general, Districts reported less spending by lower-income households, consistent with what the Anchor has reported over the past three months.
The Kansas City District reported, “Food retailers were reportedly much less willing to accept higher input prices from distributors. In particular, grocers pushed back on their suppliers, citing concerns about their ability to pass cost increases onto customers.” San Francisco reported, “Prices of grocery products were generally stable, and several contacts expected these prices to drop slightly in coming weeks, in anticipation of input costs moderating.” As we've previously discussed, the Fed, retailers, and consumers want center-store food prices to decline--a key unlock for more favorable consumer spending on discretionary goods and restoring the sales mix and margin.
Bank Earnings: High-End Spending, Low-End Holding Flat
Below, we share commentary from Bank of America CEO Brian Moynihan on his outlook for consumers from last week’s Q4 earnings report. The results and commentary from Citibank and JP Morgan were similar (All three skew more prime in their businesses).
“As for customers today...the year-to-year spending growth in the fourth quarter versus last year's fourth quarter or in the first quarter so far versus the first part of last year is a 4%-5% rate and movement of money, and that was across $4 trillion plus out of the consumer accounts and Bank of America into the economy. That 4% to 5% is similar to what it was in 2017, 2018, 2019, when the Fed took rates up, inflation was under control and the economy was growing at 2%, 1.5%, 2%, 2.5%. And so the spending level should sustain an economy, albeit our core prediction is it's slowing down from a higher growth rate in the third quarter, 4.5%, 5%, whatever it was down to a percent or something like that in the first couple of quarters next year, but we see the consumer activity indicating that they're still in the game, they're still spending money. Where they spend is a little different, more on services and going out in restaurants and experiences and less on goods at retail. They're employed. If you look at the estimates by any of you and your economists, the unemployment rate projected is really a modest deterioration from here...They're using their credit responsibly, much is made of higher credit card balances, but on the size of the economy and the size. People are forgetting that economy is a lot bigger than it was in 2019 because of the inflation and everything. As a percentage, we don't see any stress there. We see a normalization of that credit. [Consumers] are working, they're getting paid. They have balances in accounts. They have access to credit. They've locked in good rates on their mortgages, and they're employed. We feel it's good. We think the soft landing is a core thesis."
Citigroup breaks down its consumer credit card business between its Citi branded card volume and its white label/wholesale credit business, which includes Macy’s, Best Buy, and Home Depot (which represent the vast bulk of this business). The white label credit card business was slightly better quarter-over-quarter, which bodes well for these retailers (see the consumer electronics retail sales figures that we noted above). Recall that Macy’s had a negative update on credit when it reported Q2 results; as such, a better Q4 result in credit for the brand would be a welcome relief.
On the less-affluent side of consumer credit, Discover Financial's results and the outlook were a negative surprise to market participants. Allowances for credit losses, net chargeoffs (NCOs), and growth were all worse than expected. Loan growth for 2024 is expected to be “flat” (compared to +15% for 2023 and Q4 2023) due to Discover being tighter on credit, customers not willing to push balances higher, and the assumption that customer spending will be flat year-over-year. Discover CFO John Green said, “...We pulled back on balance transfers and promotional balances in the second part of 2023. We don't anticipate significantly increasing that level of balance transfer, promotional balances.” Discover also shared that spend for its customers was roughly flat for the holidays, which stems from its less-affluent customer mix.
