This past week was a busy week for Q2 2023 for a number of companies across the consumer sector. Broadly speaking, the results were better than investor expectations, largely reflecting a healthy and growing economy. Q2 GDP was reported this week, and real GDP grew +40 basis points faster than Q1 (+2.4% on a quarter-over-quarter basis). On a year-over-year basis, real GDP also accelerated (+80 bps) to +2.6% growth and nominal GDP to +6.5% growth. That’s real growth and why companies are growing revenue and earnings. Below, we've reviewed results from a handful of key consumer companies:
Last week, we wrote about theme park tourism in Florida for Q2 and the reasons why visitation was down. This week Comcast offered some additional commentary about Universal Studios Orlando. “In Orlando, our comparisons were impacted by unprecedented levels of visitation last year, but underlying momentum remains healthy as attendance was relatively in line with 2019 pre-pandemic levels, while revenue was substantially ahead of 2019 levels.” The company also noted that visits that were down and “it's just been a rebalancing with cruise lines back.” As shown below, our data shows that visitors with dwell times exceeding 90 minutes was down about -5% compared to 2019.
Royal Caribbean reported solid Q2 2023 earnings and raised their full year earnings guidance by 33% to reflect an accelerating demand environment. The company's press release noted that its, “brands continue to fire on all cylinders, resulting in record yields and second-quarter earnings significantly exceeding our expectations. Demand for cruising and our brands is exceptionally strong and we have seen another step change in booking volumes and pricing, leading us to now expect double-digit net yield growth for the full year. We also expect to achieve record Adjusted EBITDA per Available Passenger Cruise Day (APCD) and Return on Invested Capital (ROIC) this year.” The release also read, “Demand from the North American consumer has remained incredibly strong throughout the year.”
For the quarter, the number of passengers at 1.9M was 240K more than in 2019. For the year, on-board spend per day per passenger is expected to be $25 more at $85 than in 2019. Our visitation data suggests that these cruises are picking up from ports outside of Florida as three of Royal’s large ports are showing large declines in visitors. (Florida was so 2021 and 2022. People are exploring other markets.)
Royal Caribbean’s management also noted that, “Booking volumes since our last earnings call significantly exceeded 2019 for both North American and European consumers...The acceleration in demand is resulting in an increase in our revenue expectations for Europe sailings. The better-than-expected performance has mostly been driven by our European customers, which underscores our nimble and global sourcing model. Alaska only accounts for 6% of our full year capacity but represents 16% in the third quarter. We have added 3 additional ships to the region with capacity up about 60% versus 2019 for this high-yielding product. Similar to the Caribbean, we have seen very strong volume trends for Alaska sailings and load factors have been above 2019 since early this year and in line with our expectations. (And so, this suggests that the affluent U.S. consumer is also going to be off cruising over the summer and fall versus visiting shopping centers and premium shops.)
Microsoft CFO Amy Hood noted, “Our guidance assumes no significant changes to the PC demand environment. In devices, revenue should decline in the mid-30s due to the overall PC market.” This paints a challenging outlook for the consumer electronics category, something we've discussed in the past when looking at Best Buy. Next week’s results from Apple will provide a more complete picture of the category. (Of note, Intel said that the PC market was bottoming.)
Google reported a slight acceleration in search and YouTube, on an easier comparison base, which CBO Philipp Schindler said was, “led by solid growth in the retail vertical.” Doing more in the vertical is a key priority for the company this year and Schindler said, “We also continue to see success in helping businesses unlock efficient growth and deliver on their omnichannel goals. Take Ace Hardware, who tapped into AI-powered search and omnichannel bidding to capture increased seasonal demand leading up to Memorial Day. This drove increases across online sales, store visits and in-store sales, resulting in 87% year-over-year growth in omnichannel revenue from Google Ads and led to one of the largest revenue weeks ever for Ace store owners.“ Industry peer Meta also reported a reacceleration in revenue growth to +11% in the U.S. and expectations for +20%+ growth in the 2H.
From our vantage point, the much-improved trends for Google and Meta advertising reflects the growing economy, base period effects, and a further faltering in linear TV and advertising (Comcast’s video subscribers were down -523K for Q2 2023, bringing them down to 14.9M versus 17.1M at this point last year and down from the peak of 21.5M in 2016). Meta CFO Susan Li offered the following explanation, “The first is, frankly, we're lapping a weaker demand period...Second, we saw increased supply and improvements to ad performance, including improved Reels monetization as we continue to work down the Reels revenue headwind.” Looking forward and for the second half as is, Google, YouTube, and Meta will produce around +$12B in revenue growth in the U.S., or $24B annualized. By comparison, the linear TV ad market is around $62B. And so, the growth by just Google, YouTube, and Meta is roughly 40% of the total linear-TV market. Their growth will now again starve the room of oxygen for traditional media and the studio industry. (See our story on the risks to the movie industry.)
Visa reported a modest year-over-year acceleration in card present volume for July month-to-date, but that was somewhat a base period effect as the 4-year trend remained stable. As it relates to international leisure travel, Visa CEO Ryan McInerney stated, “Excluding intra-Europe, total cross-border … travel volume at 136% of 2019.” (See our earlier comments on LVMH.) Visa CFO Vasant Prabhu shared, “Consumer spend across all spending bands from affluent to low spend remained stable since March. Our data did not indicate any behavior change across consumer segments. Putting all this together, we continue to believe that the primary driver of the step-down in U.S. payments volume growth since March is moderating inflation and that the consumer has remained resilient so far...We're assuming recent trends will sustain in the U.S. and key international markets for the rest of [Q3].”
The assessment of a resilient consumer was also echoed by Fed President Jerome Powell in his press conference comments following FOMC decision to raise the Fed Funds rate by +25 basis points to 5.25%-5.50%. On the job market and wages, Powell offered, “The labor market is gradually cooling; it’s in a good place and we are comfortable, and the economy remains strong.” Also striking from that conference was the relaxed and confident demeanor of Powell. Clearly, they are liking what they see in the economic data. He also stated that from their purview, the banking industry has stabilized, following all the issues earlier this year.