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Where Do Consumers Stand Heading into the Thick of the Holiday Season?

Thomas Paulson
Dec 8, 2023
Where Do Consumers Stand Heading into the Thick of the Holiday Season?

Following our update on Black Friday last week, we thought we'd examine this week's results from retailers and management comments from several Wall Street conferences to provide a more comprehensive view of the state of the consumer heading into the holidays.

In sum, the lower-end consumer is further curtailing trips and purchases as the higher cost of just about everything has been an increasing burden. Tapped-out savings may also have impacted the timing, which the San Francisco Fed and Bloomberg recently wrote about (and shown in the figure below). For middle- and higher-income households, there was a softening in spending that started in September--traditionally a “shoulder month”--that became more pronounced in October amid geopolitical turmoil, followed by unseasonably warm weather, and the Temu effect. November is a non-shoulder month, the weather cooled, and this middle-income and above consumer--which represents the bulk of consumer expenditures--shopped across the Black Friday weekend.

Source: San Francisco Fed Blog, citing Bureau of Economic Analysis data and author calculations

Our “crystal ball” says that things will remain relatively steady until next week when the holiday momentum will pick up. Early next year, January and February will likely return to a softer trend given difficult comparisons and being shoulder months. Assuming normal weather, continued easing in interest rates, and packaged food prices falling, March should be the start of a positive and firm trend. Below is the news from this past week that informed this view and outlook.  

  • American Express CEO Stephen Squeri: “If you just go back in the second quarter, we had about +8% overall billings growth. Third quarter, it came down to +7%. And in October, everybody got a little bit skittish. And I think other people have said the same thing that growth wasn't as strong in October. And we didn't see growth in October like it was in the third quarter. And I think there's a lot going on in October, okay? But if we look at November, November is back to sort of what we looked like in the third quarter. In our holiday season, U.S. consumer retail was very strong from Thanksgiving all the way to Cyber Monday. So we're very encouraged by that. Overall, goods and services from a retail perspective, from a consumer retail and international, both U.S. and international, very, very strong. We still have double-digit growth in billings from an international perspective...But overall, for the year, it's been pretty consistent for us with double-digit transaction growth and that continues.” (Note that American Express has a more affluent consumer base.)
  • JPMorgan Co-CEO of Consumer & Community Banking Marianne Lake noted that “Spending is still solid, has returned to be in line with pre-pandemic or historical norms. A stable cohort of customer spend is relatively flat year-on-year, but that, again, is relatively consistent with pre-pandemic. We're seeing spend growth continue to be robust. And we had a good holiday season. I think spend continues to hold up nicely. Cash balances, we were here last year saying they're normalizing...There are still more cash buffers than there were pre-pandemic, but we're talking about days, particularly for the lowest-income customer.”
  • Citigroup CFO Mark Mason said, “...the recent holiday activity we saw in branded cards, I would say, good momentum year-over-year through Cyber Monday. So Black Friday and the Cyber Monday, better than kind of pre-Thanksgiving levels...On the retail services (Macy’s, Best Buy, and Home Depot’s card), it was probably flattish year-over-year, but a little bit better than pre-Thanksgiving momentum, more activity. And so good signs there. And I'd say the strength there electronics and department stores, and less so in home improvement.”
  • When asked about the decline in Q3 2023 of retailer comparable-store sales, Synchrony CEO Brian Doubles said, “The card customers tend to be their best customers, their most loyal customers. And this is where we get even more engagement from our partners on, what do we do to re-engage, re-energize that loyal base of customers. And that's all the work we do with our data analytics teams, life cycle marketing, campaigns, promotions. And so we've really accelerated a lot of that activity in the back half of this year, and I think that's helping. The other thing that's true in times like this, where on the consumer side, where they're trying to kind of make every dollar stretch as far as they can, that first purchase discount really matters, the promotions and the offers and that life cycle marketing that we're doing, that really resonates with consumers. I think we're attacking it from both sides. And I think you got a really engaged partner base, which is great. and they're trying to make holiday as good as they can make it. And then you've got on the consumer side, you've got an environment with -- it's a little bit more uncertain, and I think they're just trying to make that dollar stretch as far as they can. And that's where we come in, and our products actually add a lot of value there.” (The implication is that the cash-tender customer is the cohort that’s disengaging in the second half of 2023 which is what’s particularly leading to weaker shopper traffic trends.)
  • Discover Financial CFO John Greene noted, "We are seeing slowing sales. In the third quarter, we were around 3% year-over-year growth. Fourth quarter, actually a very, very tough comp. There was significant growth last year, fourth quarter. But as we look at October and November, we're at somewhere between 0.5% and 1% up year-over-year. Now the categories are fairly mixed...We're seeing our 5% category, which is Amazon, Walmart and Target this quarter actually experiencing significant growth, largely consistent with the economy. Overall, retail and other categories, we're seeing it down and service spend up about 3%, service and entertainment. The implications of that are that consumers in the lower half of the economy are belt-tightening. They felt inflation and they've belt tightened. Then the upper two quartiles of the economy are still spending at a single-digit rate, but certainly slower than what they did a year ago...Think about a consumer that makes $50,000 a year? When your inflation outpaces your wage growth, they're making choices in terms of what they're going to spend, what bill they're going to spend and what they're going to, frankly, put on their table. The upper end doesn't have to deal with those sort of decisions. My sense is the inflation impacts have been felt and our specific portfolio, there's been belt-tightening on the bottom, on the call it the bottom half. On the upper half, I wouldn't say it is business as usual. They're impacted by it, but certainly not to the same extent...but economic conditions, despite high employment rates, are challenging and will likely remain challenging for a good portion of 2024.” Note that Discovery services less affluent households and these comments align with our read on fiscal Q3 2023 and the Black Friday shopping period.
  • Mattel CEO Ynon Kreiz said, “We believe the industry is now reverting back to historical norms in terms of shopping patterns and the way the industry will be paced. 2020 was the COVID year. 2021 and 2022 were very much aberrations, especially 2022 in terms of the movement of inventory and purchase or shopping seasons. And we believe 2023 will be back to normal in terms of shopping patterns and consumer behavior and also even inventory (at retail level) reverting back to historical norms…Quarter-to-date, point-of-sale remains positive, and we continue to expect a strong quarter and to outpace the industry and to gain market share, both for the quarter and for the full year.”
  • Lowe’s CEO Marvin Ellison said, Overall, I'm pleased with the Black Friday weekend and specifically, the demand we saw from our consumers for appliances, gifting items, tools and just holiday overall. We're pleased with what we saw in-store and online. What's interesting is the entire omnichannel infrastructure that we've established in the company is starting to pay off. A point in case, we have certain markets where you can go in and have your family tradition to pick your live tree and then we can deliver to you same day. And that's a unique way of saying, celebrate the season in a traditional way with we're going to have a modern process...And we're seeing customers respond and resonate really well to those types of enhancements to how we serve them. Now although we're pleased with the Black Friday weekend, pleased with the customers' response to value and appliances, there's still a lot more gifting and bigger selling events in front of us. We are going to continue to execute well. But again, if I take a snapshot at Black Friday, we feel good about what we saw.”
  • Walmart CEO Doug McMillon was interviewed on CNBC and noted that things were a little soft (as they planned), but they did well with higher-income consumers over Thanksgiving. He also noted that everybody (regardless of income) has been price sensitive. For 2024, he expects the unit trend for general merchandise to improve (it is now) given that prices are -5% lower year-over-year and that Walmart was doing a lot of price rollbacks. The takeaway is that Walmart is seeking to rebuild its sales mix towards high margin general merchandise (we don’t know if the price reductions are coming from suppliers, higher ad revenue, lower supply chain costs, or Walmart’s margin--it’s likely a blend). Lastly, McMillon’s tone was such that Walmart will not be accepting of any price increases by suppliers and giving preference (shelf space) to those that are reducing prices.
  • Walmart CFO John David Rainey said, “When we got to our third quarter, we saw that same consistency until October. In October, the first two weeks looked like the prior couple of months in the quarter, but the last two weeks were off trend. We speculated that some of what we saw could have been related to weather, and I think certainly some of it was, but I think it was more than that...Then we got to November, the first week of November was more on trend with what we had seen as its strong. Second week was very similar.”
  • Amazon’s CEO Andy Jassey on CNBC had a similar view that the consumer was spending but they are seeking bargains and deals, and looking for lower priced items. (Amazon is mostly general merchandise.) In the interview, Jassey highlighted delivery speed and the expansion of consideration in categories like consumables. “60% of shipments in Amazon’s top 60 metros have been same/1-day deliveries in the first half of the year.” That has to be a significant pressure on drug stores, convenience, and conventional grocery.
  • Ulta Beauty reported Q3 2023 comparable-store sales of +4.5%. CEO David Kimball said, “Comp sales growth for the quarter was driven by approximately 10% growth from our digital channels. Stores delivered low single-digit comps as we lapped high-teen growth last year. Store traffic remained healthy, increasing in the high single-digit range. (Placer shows a +9% increase in visits year-over-year.) Turning to performance by category, skincare was again our fastest-growing category, driven by double-digit growth in mass and prestige segments. Beauty enthusiasts have maintained their skincare routines while also experimenting with new regimens. Consumer interest in moisturizers, serums and cleansers is driving growth, and brands leading into these trends like Drunk Elephant, Good Molecules and COSRX contributed to our strong results…Shifting now to our plans and expectations for holiday. The holiday is off to a good start...Our insights suggest that consumers are ready to celebrate even as they navigate in an uncertain economic environment.” Looking at the multi-year stacks, store-only revenue per square foot was up +14% compared to 2019 and +11.5% in the first half of 2023; however, seasonality was less than prior years. We suspect that part of the reason that overall retail sales were weaker in September/October is that the retail industry’s seasonality is changing (i.e., lower shoulder periods and higher seasonal periods). Placer also shows that Ulta also had a softer October followed by a rebound in November.

Kimball also shared, “From a channel perspective, we gained prestige beauty share across digital channels, but were more challenged in brick-and-mortar channels, reflecting the impact of increased distribution for prestige beauty. While these dynamics increased competitive intensity in the short term, we are confident our sales-driving strategies will support our ability to capture more market share over the long term." Kimball is referring to Sephora at Kohl’s, which we wrote about last week, and the loss of trade area market share in prestige sales. For perspective, NPD/Circana reported prestige category sales were up low-double-digit for the period, Sephora was up high-twenties, and Ulta was down.  

Kimball also noted, “There are hundreds more brick-and-mortar locations in the market now than there were even just a couple of years ago. What we see is more of a short-term impact from this competitive -- kind of the competitive pressure. Historically, as we've seen new locations open near our existing locations, there's a short-term modest impact. But relatively quickly, our stores are able to rebound and recover and to drive growth, share growth over time...Our holistic strategies and everything that we're doing across our assortment, across our brand engagement, our loyalty program, and then certainly, the human experience that we uniquely deliver in our stores give us a lot of confidence that while there's some short-term pressure year-over-year, we're still stronger in share than we were pre-pandemic, and we're confident in growth behind our strategies going forward.”

Regarding Ulta's new small format prototype, Kimball noted, “We've been testing and I'd say, expanding really a smaller format, which is a 5,000 square foot store that's really targeted towards smaller markets, more remote markets, and we're having good success there.” Separately, on its Target locations, “We're up to 510 of those locations. Our store-level earnings, our store profitability remains very healthy. We're very positive about the new store opening performance, and we're confident in the opportunity to continue to expand our presence.”

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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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