This week brought more reports of the broadening slowdown in consumer spending with Airbnb and Disney also noting a slower pace in July, as did Hilton, Expedia, and Bookings.com (see our report from last week for more on the topic). Disney expects a modest decline in domestic attendance for Q3 2024 and Airbnb expects revenue growth to slow by 150 basis points (to +8%-10%). Airbnb’s CFO Ellie Mertz said, “In both Q1 and Q2, what we saw was that lead times were basically equivalent with what we have seen in 2023. There wasn't really any timing shift of behavior in terms of when guests do bookings. What we've seen more recently, and in particular in July, is a shrinking of the lead times. And in particular, what we've seen is that there continues to be very strong growth of the shorter lead times, anything from same day to next week to a couple of weeks from now. But what we're not seeing the same level of strength is in those longer lead times--2 months from now, what you're booking for Thanksgiving, what you're booking for Christmas. And so it's that softness in terms of longer lead times...It's not that consumers are not necessarily going to book that trip for Thanksgiving or Christmas. It just appears that they have not booked it yet.“ (Said differently, the consumer is being more cautious in their spending.)
As shown below, after a better May, Disney’s attendance slipped lower in June and then again in July. The depression is more pronounced among less-affluent visitors, but the trend is also seen in the more-affluent as we show in the figure below. Disney’s CFO Hugh Johnson affirmed these trends; he also noted that the more-affluent were still off on international holiday, impacting Disney’s results. Partially offsetting the lower domestic demand was improving trends by international visitors to the parks. (Six Flags also noted a depressed July which was blamed on Hurricane Beryl, excessive rain, and brutally high temperatures in several larger markets.)
It wasn’t just less spending on "fun" in July, as traffic decelerated across retail for the month. As such, when retail sales for July are reported next week by the Census Bureau, we expect the year-over-year growth rate to have slowed by 150 basis points or more to +2.3% for core underlying retail sales (i.e., excluding gas and auto). The deceleration in sales should be less than traffic as the slowdown was driven more by the less affluent versus the more affluent. There doesn’t appear to be any singular cause for the slowdown, just consumer frustration with the higher prices (call it a “buyers strike”), as well as compounding budgetary pressures steaming from higher interest expenses, less credit availability, and the higher cost of insurance. A more difficult comparison, extreme weather, hurricanes, and the news cycle are other contributors. In all candor, we are surprised by the slowdown; however, like so many other times over the past three years, the environment has been volatile and difficult to understand given the multiple years of unprecedented conditions that are layering on one another. If we were to pick one dominating factor for the latest slowdown, we’d point to the Fed’s tight monetary policy, which has arrived; it was slow to arrive (2.5 years), but it has arrived now and it’s suppressing demand as that was the intention. Our second half of 2024 outlook stated that those brands that can offer lower prices than last year, are the ones that will win market share and sales growth (in addition to excellence in merchandising and service levels). And so, this is the notion that we plan to stay attentive to when retailer earnings are reported over the next month.
July’s "buyers strike" in both goods and services will push prices lower and inflation towards the Federal Reserve’s 2% target. From Fed Chair Powell’s comments last week, and from those of other officials, we see the Fed gaining greater confidence to lower the Fed Funds rate at the September meeting. The much-softer-than-expected payroll report for July (only +114K jobs added) pushed market expectations to 100-125 basis points in cuts this year (plus an ease-off on its balance sheet taper). 100+ bps is a meaningful amount, and it should put the first half of 2025 in a much better position than this year for housing, housing-related goods & retail, and lower-end discretionary spending (benefitting mass and dollar stores). The transmission of the Fed’s tightening/easing actions on the economy is slow. However, the tightening period was against conditions set off by the pandemic and the recovery. We’d expect this easing to be much faster than that 2.5 years. How much faster? Given all of the extremeness and volatility in the world and economy, we’re hesitant to put a guess out there, but we still expect a strong holiday. The back-to-school period? Likely, less good.
However, it’s not all gloom and doom; this week shined light on a few areas that are seeing steady to improved demand. Ralph Lauren said its U.S wholesale business was on track at a low-single-digit decline (i.e., no better or no worse than the first half of 2024). Digital native brand Revolve reported better revenue trends, including the expectation for mid-single-digit growth for Q3 2024. Its domestic business returned to growth for the first quarter since 2022. As Revolve caters to the aspirational luxury female shopper, the firming of the trend is a positive for other brands that cater to the aspirational luxury consumer (i.e., things aren’t getter worse and maybe a floor is being put it). Another intriguing element in Revolve’s results was a decline in marketing spend per order to $18.92 from last year’s $22.71. That ease-off may reflect a lessoning in competitive spending by Shein. Should that prove to be the case, we should hear that from others as well.
Revolve Co-CEO Michael Karanikolas said, “We feel really good about the trends we saw in the second quarter continued into Q3. And we know others out there have commented on some weakening of the customer and some macro pressures. Thankfully, it's not something we're seeing in our own data. How much that speaks to the macro environment versus us just executing well and gaining strength in the market, I think is too early to say. But we feel great about our own trends that we're seeing there as we look at the back half of the year." CFO Jesse Timmermans said, “Back-to-school is a great season as well, but again...nothing specific to call out. And then I think just all of the initiatives that the team has been working on through last year and into the first half of this year that continue to really take effect and you could see visibly in the results this quarter will continue to build.”
Boot Barn, levered to the currently hot Western trend (see Levi’s recent results), reported improved results with its CEO Jim Conroy saying, “I am very pleased with our first quarter results and want to thank the entire Boot Barn team across the country for excellent execution. We increased revenue by more than 10% with growth in sales from both new stores and same store sales and exceeded the high end of our guidance range across every metric, including a significant beat of earnings per share. The sequential improvement we have seen in consolidated same store sales growth not only continued into the...quarter but grew consistently from month to month within the quarter itself.” Traffic (Placer) was solidly up for May and June, but down in the 1H July; however, some of that slippage was comparisons as the 5-year traffic is more stable. July was also lapping Taylor Swift's Eras Tour and Morgan Wallen’s tour. Hurricane and dangerously hot weather were also cited by management. (We show Los Angeles to get at momentum by influencers; in other words, its our trend heat indicator.)
Costco--whose business is about absolutely lower prices--reported another strong month, with July U.S. core comparable sales increasing +6.3% including a +5.1% in transactions and a strong merchandise mix. Non-food comps were up low-double-digits with jewelry, toys, and seasonal all called out for their strength. Food categories were up mid- to high-single-digits; whereas the category is up only 1%-2%. The 6.3% figure matches June’s rate (i.e., no slowdown in spending for this customer segment, which is typically more affluent). However, this segment is also selecting lower prices.
