Retailers are finding themselves in a state of uncertainty, caught between hope and despair, much like the seasons in Dickens’ novels. Recent data points from June and July paint a mixed picture of consumers’ spending habits.
On the negative side, housing turnover has been on a decline for two consecutive years. Higher home prices and mortgage rates have deterred potential buyers, even causing existing homeowners to shy away from remodeling projects. The higher interest rates have put a strain on their budgets.
However, there are positive indicators as well. Consumer confidence reached a two-year high in July, surpassing levels seen during recessionary periods. With the stock market performing well in recent months, over 60% of Americans with investments have seen significant gains.
Other data points offer a less clear perspective. While food-price inflation has decreased from the highs of last summer, grocery costs still continue to rise by mid-single digits. Gasoline prices have also seen fluctuations, coming down from last summer but rising noticeably in July. This trend can be observed in other materials as well – price increases have slowed down with lower inflation rates, but costs remain high compared to previous years.
Due to these uncertainties, personal savings rates have been fluctuating. Despite being below pre-pandemic levels, the share of income people are saving has seen fluctuations. In July, it declined compared to June but remained higher than the same month a year ago.
It is important to note that all these observations are made before the resumption of student-loan payments this fall.
Investing in Retailers: An Opportunity with Caution
Consumer Spending Outlook at Risk
According to KeyBanc analyst Bradley Thomas, the outlook for consumer spending in the next 6-12 months remains at risk. Factors such as higher cost of living, elevated mortgage rates, and the resumption of student loan payments could hinder people’s ability to spend. Despite employment remaining strong, non-agricultural employers added the fewest jobs in 2½ years in June.
Trade Down and Discretionary Spending Pullback
Thomas highlights that with much of the pandemic “unwind” behind us, the bigger risks ahead are the “trade down” phenomenon and a potential pullback in discretionary spending. However, for select retailers, valuations and falling input costs provide support for long-term investors.
Positive Data for Four Stocks
Thomas rates four stocks as Overweight, all of which show positive data. Three of these are discounters: Five Below (ticker: FIVE), Ollie’s Bargain Outlet Holdings (OLLI), and Walmart (WMT). These companies are expected to benefit from their value offerings despite industry headwinds.
Bright Outlook for Select Spending
It’s not just Thomas who holds a positive view. Other analysts also believe that retailers known for offering good value are poised to benefit even in challenging times for the industry.