The Strongest Consumer Environment in Years

Retailers are releasing earnings reports this month and for many stalwarts second quarter results were excellent:

  • Walmart saw comparable sales in the US increase 4.5%, its best result in more than ten years.
  • Off-price retailer the TJX Companies, owner of TJ Maxx, Marshalls and HomeGoods, saw comparable sales rise 6% with increased customer traffic as the primary driver.
  • If one thought good results from discounters Walmart and TJX were a sign of a struggling customer “trading down,” Nordstrom saw comparable sales rise 4% in the quarter, its highest since 2015.
  • The Home Depot saw comparable sales rise 8% in the quarter as the home remodeling boom continues.
  • Target increased comparable sales by 6.5%, the best in 13 years, driven by the strongest traffic growth since the company began reporting the metric in 2008.

As Target CEO Brian Cornell said, “There is no doubt that like others, we’re currently benefiting from a very strong consumer environment, perhaps the strongest I’ve seen in my career.”

While the strength was broad-based, not all retailers are performing well.  Challenged companies like JC Penney and Sears struggled, but their business models have been broken for years.  Similarly, brands failing to connect with younger consumers like The Gap and Victoria Secret (owned by L Brands) remain in a slump.  However, retail sales in July increased 6.4% over last year, and now that the industry is seeing consumer spending rise, stronger companies that invested in their in-store and online shopping experiences are seeing the benefits.

Before I paint an overly rosy picture, let me note that few retailers are seeing margins expand.  Margins are tight thanks to stiff competition, rising wages, transportation costs and, in some cases, import tariffs.  Nonetheless, a year ago much of the brick and mortar retail industry was left for dead in the face of online competition and a rising number of retail bankruptcies.  Today, we see a resurgence as consumers have more to spend, and they are not only buying online but also visiting stores in increasing numbers.

It is no accident that strong retail earnings come as the stock market hangs around all-time highs.  Consumer spending is 70% of the American economy (GDP was up 4.1% in Q2), and while retailers are just one sector in the stock market, retail stocks in aggregate (via the Retail ETF XRT) are up over a third in the last twelve months.

Will the good times for retail stocks continue?  Perhaps.  Expectations were quite low a year ago and even a few months ago, but the increase in traffic and comparable sales (and rising stock prices) will raise forward expectations.  This could set up for weaker stock returns in the sector even if sales rise but more slowly than this quarter.

But predicting the short-term swings of retail stocks is not why I decided to highlight the strength in this sector.  The key takeaway is the strength of the consumer environment – what Target’s CEO calls “perhaps the strongest I’ve seen in my career” – demonstrates that the US economy shows no signs of slowing down.

I often hear concerns from many that the bull market – which some are calling the longest bull market in history – has gone on too long and we are due for a crash.  Many fear that after such a long recovery since the Great Recession, the economy will run out of steam and stocks will fall a result.  While there are threats to economic growth – the trade war chief among them – it is hard to square these concerns with the acceleration we are seeing in the consumer economy.

While we cannot predict market volatility, with the economy this strong the chances of a permanent loss of capital remain low if one’s time horizon remains long term.  This does not mean investors should load up on stocks if they have not already as market participants are heavily weighted toward risk.  But those calling for a crash need to explain how, when and why one will happen in the face of a growing US economy driven by the strongest consumer we have seen in many years.

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