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Retail: Where Do We Stand After Q1 2024

Thomas Paulson
Apr 5, 2024
Retail: Where Do We Stand After Q1 2024

The U.S. Census Bureau will report March retail sales in a couple of weeks, and we expect the report to be better sequentially--as was the case in February--with the drivers being those that we had articulated earlier this year, including improving consumer willingness to spend, easing comparisons, more favorable weather, Easter pull-forward, and tax returns, among other factors. Supporting our view for March is stronger category traffic, as shown below (most other industry categories also show the improving trend) and retailer management commentary at an investor event this week. That said, some of those comments were incrementally better (Home Depot and Dick’s Sporting Goods) and some were worse (Ulta).

In terms of consumer sentiment/confidence, the University of Michigan consumer survey reading for March showed meaningful increases month-over-month to a level that is 30% above last year’s. Over the past two years, we’ve argued that the high rate of inflation and level of prices were the most meaningful to consumer unease, poor sentiment in the economy, and lower spending on “stuff" (physical goods). Both Michigan and the NY Fed’s inflation survey (below) show a meaningful improvement in consumer expectations on the pace of inflation.

As shown in exhibit below, household budgets and the ability to spend has greatly improved on a year-over-year basis per the U.S. Census Bureau Household Pulse Survey with those responding that they are facing no difficulty paying their household expenses, up to 16.4% in 2024, from 11.5% last year, driven by substantial improvement by households with incomes above $50K (i.e., where the bulk of discretionary goods spending takes place). We expect these trends to continue, which should allow for more consumer spending on goods relative to last year. That shift will allow for a sweetening in the merchandise mix of general merchants and a firmer trend for other channels of non-essential retail. Those drivers, in combination with the heart of the spring season (consumer spending has been more seasonal), should yield an even stronger April.


Recall that last April, our data indicated that foot traffic moderated month-over-month by -270 basis points and physical goods retailer sales ("stuff”) slid -250 basis points month-over-month to mark the nadir in growth for the first half of 2023 at -1.4% (on a year-over-year basis per the Census’ retail sales report on general merchandise). At the time, we argued that the slowdown was due to “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. Also, in-person experiences and travel are still a priority for consumers and rising food inflation persists and those combined continue to press out discretionary spending on goods.”

This year’s Easter (Mar. 31) was earlier than last year’s (Apr. 9), which pushed Easter merchandise into March. This created a significant traffic lift for Walmart, but not so for Target (below). March for Walmart was +230 basis points stronger to +7.7% year-over-year and for Target was +120 basis points stronger to +6.4%, with March strong for both with and without Easter.

In terms of visitors this year versus last year, the table below shows that Walmart had a larger increase (9M) in shoppers from trade areas with household incomes above $125K. Note the percentage of sales that came from >$125K households would be far higher--1.9x--than the shown 14% (or roughly 27%) per the BLS’ consumer expenditure survey. As such, we would expect Walmart to report on a very strong Easter week.

Below, we discuss takeaways for other retail categories with Q1 2024 in the books.

Home Improvement

Earlier this week, Home Depot CFO Richard McPhail said, “[During Q4] we saw the kind of two mind frames with the customer. The first was highly engaged in spending. When you look at the success of our holiday programs, whether that's through decorative categories, through appliances, we had an exceptionally strong season. I'd say kind of the base of customer spending is very healthy. When you get to larger ticket projects and for us, when you're thinking about a project associated with your home, the larger they get, the more likely they are to be debt-financed.

We have seen the second mind frame really as a mindset of deferral of larger projects that might be debt-financed. Our customer has the means to do large projects. They have the desire to do them. And they tell us that it's simply because rates are elevated. We're not going to do that right now. We could if we wanted to. We're just going to wait. Some of this is caused by this anticipation that, of course, there will be Fed cuts. So maybe we wait a little while to do that larger project. And so the health is there. It's more just, okay, when do we execute that project? At the same time, what our Pros tell us is that their customers still engage in projects are just of a smaller nature. So you might not renovate your entire kitchen. You might do that piece by piece, but very healthy customer.”

These comments support our view that once interest rates become unstuck, and begin to move lower, there will be a notable step up in home-related consumer spending, which could come as soon as the second half of 2024. As shown below, traffic for the industry has notably improved going into spring. March and April are 25% larger months from a dollar sales perspective and May and June are 15% larger than March / April. As such, the trend is improving for the months that matter. Home turnover remains stuck at historically low levels, that too should improve in the second half of 2022 (an argument we laid out here). With that, there should be another driver to home improvement retail as a homeowner typically spends twice at Home Depot (or other home improvement retailer) in a move-year relative to a non-move year.


Sporting Goods/Athletic Footwear and Apparel

Last week, we wrote a piece on athletic footwear and the athleisure category in which we discussed the mismatch between supply (too much) and demand (not enough). And so, we were attuned to this week's comments from presenting companies like Dick’s Sporting Goods and Foot Locker. Dick’s CEO Lauren Hobart said, “[Last year], we didn't see any trade-down from any income demographic. We didn't see a trade-down from best to better or better to good...And I would point to the differentiated products that we have access to, where we can offer everything from entry-level to enthusiast-level product, where we've gotten brands that are a little bit on-trend and a little more lifestyle-forward...So across the board, I would say, strong consumer, but also very glad to see that our strategies are working.”

As it relates to Nike’s comments that they need to do better in wholesale, Hobart said, “They also want to bring their entire brand to life. So if you think about a head-to-toe experience where you can really outfit somebody, accessories can be brought to life. So the brand can live. As you think about wanting to bring your brand to a wholesale channel, you would want to put a rooted in sport and an amazing brand experience, first and foremost.”

On the expanding number of large-growth brands in the athletic category, Foot Locker CEO Mary Dillon said, “As we exited the fourth quarter, our non-Nike sales was 40%, so up about 300 basis points from the last year. And across the board, there's some interesting things happening. Adidas has had some real success with the trends. So the Samba, the Campus, the Gazelle and they're in all stores, I believe, most, if not all, right? New Balance is in most stores. New Balance is a brand that the growth has been over 100% for us in the last year. Think styles like the 1960 to 2002 kind of bringing back lifestyle running. That's our fourth biggest brand right now, and we're going to continue to add more doors in 2024 and beyond, especially focused on kids and women. Another example is Crocs and UGG in most stores, all doors. Both brands that like have more seasonal and more innovation that's around the trend, right, Crocs doing a lot of tie-ins with various partners, UGG and the Tasman, that holiday was very popular. (See our report here.) On Running is in a little over 400 doors right now, 420 doors in 2024, and we'll be continuing to expand doors. And HOKA is in about 150 doors in expanding...Over time, will we get to more doors and as with, it's a balancing act between us and our brand partners and what's right for them and right for our customers.”

Our takeaway is the innovation needed to win consumer choice in athletics is appreciably escalating, which enriches the opportunity for retailers to bring more value to consumers by offering them rich choice and helping the consumer make the right choice. Combined, these should result in higher sales and margins for the retailer.


As we previewed in January, after three years of outsized gains by the prestige beauty category, 2024 is likely to be more normalized compared to the +14% growth in 2023 per Circana. The slower pace would also reveal itself in the comparable-store results of Ulta and Sephora as well. That is what we heard from Ulta CEO David Kimbell earlier this week.

Before going into Kimbell's comments, we’ll point to the traffic results shown below. On a one-year basis, there is a clear deceleration from December’s outsized rate for both Ulta and Sephora. However, on a five-year basis, the only notable trend is consistent strength. As such, it would appear that what Ulta is experiencing is more the consequence of multi-year compounded growth versus a consumer shift. That said, we’ve highlighted before that the Sephora at Kohl’s expansion has diluted Ulta’s market share, which we touch on below.

Kimbell said, “What we're seeing right now as we're two months into our fiscal year, we have seen a slowdown in the total category..We did not anticipate that it would continue at the rate that it's been growing. So we have planned for moderation in total category growth to kind of the mid-single-digit range. What we've seen so far is a slowdown in the total category across price points and segments. That's a bit earlier and a bit bigger than we thought. Still growing, still a lot of engagement, all those things that I've had, but we've seen this growth rate come down probably faster than we anticipated. We're watching and monitoring closely on that, staying very close to our guests. There's a lot of positive signs about how they're engaging with our new brands in stores, online, connecting with our business...[The] first half of last year was also very healthy growth with some of the economic environment dynamics that we're sorting through.” Kimbell also called out make up as a category where the prestige level was seeing downtrading, with strength in NYX, e.l.f., Morphe, and Juvia's Place. (Recall our comments about Elf Beauty’s robust growth, in contrast to Estée Lauder.)

Kimbell also noted, “Where there's been strength in lower price, it's driven more by newness, marketing, innovation, TikTok, excitement, than just the fact that it's a lower-priced product. But as we go through this year, if the economic factors weigh heavier on our guests, we do feel confident in our position, the ability for our guests to make choices based on price point within Ulta.” This quote suggests that the “trend” is also being driven by influencers and social media (i.e., “demand generators” are sensing that their audience is more receptive to content that reflects “doing great things for less money” and that’s what they are amplifying on.

Reading between the lines here, what seems to have changed is conversion rate and basket size--both units and average unit retail (AUR). Engagement seems to point to traffic, which is high based on the 5-year CAGR. The basket size impacts could be consumer malaise with price inflation, so there may be a reaction to that with consumers picking smaller volumes and brand points. This is a developing consumer trend also evident in durables goods, consumer electronics, home, apparel, grocery, and spirits & wine. Said differently, folks have had enough of elevated prices and are voting for items/SKUs that are lower priced.

On Sephora at Kohl’s, Kimbell had to say, “...more than 1,000 new points of distribution in prestige, that being a big driver. And we're seeing really everybody that is either in beauty or has the opportunity to expand their beauty presence because it's a great category...I've been with this company for 10 years. I've seen a lot of different versions of competition, and it's always been competitive, but there's certainly some dynamics going on right now that are somewhat unique, and that's one. We haven't been in an environment where there's been essentially 1,000 new points of a key competitor of ours that have come in, and then many of them are in close proximity to our existing store...What we see is the dynamic that you talked about is, yes, there's a settling-in period. Consumers are navigating the dynamic. But relatively quickly, that store that's impacted is able to recover. We're confident in that over the long term that our ability to compete, our environment, whether it's to Sephora, Kohl's or full line Sephora, a Walmart, a Macy's, Nordstrom or online competitors. Our experience is unique and differentiated and allows us to continue to connect...What's different this time for us is the scale and the pace. I mean it's been roughly 24 months. We're up to 900-plus locations. We don't have experience at this scale, so the collective impact and how we cycle through that. We're watching it carefully, and our focus is on doing what we do best because we know that will allow us to succeed in a long time. But we're in the midst of it right now. It's a bit TBD on how the kind of lingering impact of that and how long it takes to cycle through...Last thing to your question about cosmetics, it's an important part because that's a big part of our environment and their environment. But if you've been into one of those, it's essentially most of what a full line Sephora offers. It's makeup, it's skincare, it's haircare, it's fragrance, it's a big part of what they offer, and that's in that environment.“

The table below highlights the competitive pressure hitting the category for retailers. If we assume that the category grows by +6% this year (reasonable as the category will take little like-for-like pricing this year), it will only produce half the value growth that it did in 2023. For 2024, we assume outperformance (+11%) by Ulta and Sephora, and a similar level of dollar volume growth for Kohl’s. Combined, that would leave other retailers down (included in “other” is Amazon, which grew nearly +30% last year, per Nielsen). Amazon's growth is coming from access to new product; recently Estée Lauder announced that Clinique would be available on Amazon. High growth for Amazon would leave “other” chains down more severely, who will fight to retain and grow share by amplifying their selection, service levels, and value. That amplification will challenge our prior assumptions. To conclude, the prestige beauty category is going to have an interesting 2024, following an exquisite three-year period.

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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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