Sizzle of the Week: Retail’s 2018 Rebound
Retail has had a rough couple of years, as most players that aren’t Amazon have struggled to cross the digital, omnichannel chasm. On the whole, with some notable exceptions, retail has landed on our Fizzle list more often than the Sizzle list in recent memory.
But this week, buoyed by a string of rather encouraging numbers, retail is sizzling, and not at all softly.
Consumers seem to have gotten their shopping groove back, and brands that had doubtful looking futures as recently as six months ago are showing strength – and not just in fit-and-start surges, but more consistently. Coming down the stretch in Q2, things are looking a good deal brighter than they have in some time.
According to the Department of Commerce, retail sales jumped .8 percent in May to more than half a trillion dollars ($502 billion), doubling analysts’ expectations of a .4 percent increase. Excluding auto sales, which are more volatile month-to-month than other retail categories, spending was up .9 percent, beating out the .5 percent expected by analysts.
The May 2018 retail sales are the highest they’ve been since November of 2017.
Areas that saw marked increases included car sales, building supplies, sporting goods, healthcare and apparel.
Powering the push in spending, according to the Commerce Department reports, are historically low unemployment figures, wages finally starting to show real gains and additional liquid capital among workers due to the tax cuts of late 2017. That has pushed more consumers back toward consumption, and merchants have seen the benefit of that.
That combination of factors, economists think, will push very powerful growth figures when the Q2 numbers are out. Economists are predicting that Q2 will show 4 percent growth in U.S. economic output, according to The Wall Street Journal – the strongest growth period in several years, if it proves out.
Output was up 2.2 percent in Q1, in line with averages since 2009.
Those figures, notably, have not been adjusted for inflation, though increasing costs are part of the story as to why retail sales figures are up. In fact, some goods are getting more expensive.
Gasoline, tied to increasing oil prices, shot up – meaning gas stations alone saw sales up 2 percent.
But even accounting for inflation, Americans are also buying more. Retail sales are up 5.9 percent year over year through May, which roughly doubles the rate of inflation as calculated by the Department of Labor. It’s a fact confirmed – or at least lent credence to – by a recent run of powerful performances in retail.
Some of those performances, granted, aren’t a big shock. Amazon’s stock is up 46 percent and Walmart’s is up 43 percent.
But what is perhaps somewhat surprising is that Macy’s, in terms of share price, actually saw the strongest growth, with stock up 56 percent year on year. Also turning in impressive performances were Target and Kohl’s, where share price was up 42 percent.
Some of that growth, of course, comes because Macy’s had a lot of ground to gain back, as its share price lost a third of its value in 2017. Now that consumers are clearly out and shopping again, Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, told Financial Times, it is natural for investors to want to scoop up some of those stocks whose prices are relatively inexpensive. Particularly, he noted, for retailers that are beginning to show some relative strength.
“When growth is abundant in a sector, investors tend to buy the cheaper stocks,” said Gokhman. “Given the relative cheapness of brick-and-mortar names versus eCommerce, it thus makes sense that they’d begin to outperform when consumer sentiment and spending accelerates.”
Gokhman further noted that the current rapid momentum is likely not sustainable when it comes to retail segment share growth, and that things are expected to cool down in the back half of the year.
And, of course, there are several reasons to at least qualify the enthusiasm about soaring spending among consumers, since it is in fact paired with rapidly increasing household debt levels. According to Moody’s forecasts, U.S. household debt could hit $4 trillion, primarily in the form of credit cards and auto loans, which have been steadily climbing.
In and of itself, that is not terrible news, as long as consumers are managing all that debt well. But default levels have also been climbing, and some experts are starting to get concerned about what comes next.
“Although consumers’ financial health is generally strong, there is a risk that they will take on too much credit in the present accommodative environment,” Moody’s wrote in a recent report on U.S. indebtedness in 2018.
Moreover, while lots of retail is beginning to look up in segments, there are also segments where the great thinning is still underway. Mall operators, for example, are finding it difficult to sell low-end mall retail, even at fire sale prices. Some malls – mid-tier and up – can be rehabbed into a more modern shopping complex. Others really can’t – and, as it turns out, no one wants to invest in them because no one really knows what to do with them.
But while problems remain, and while an eye should always be on the debt thermostat, it’s undeniable that retail is beginning to sizzle more in unison these days, as opposed to in isolated hisses and fizzes.
Adyen: 90 percent upside on first day of trading is nothing to sneeze at, even in an age of relatively well-performing tech IPOs. Adyen comes out of the gate and crushes it, so to speak, as FinTech moves beyond the unicorn stage to … a unicorn on steroids, with a $15 billion market cap.
Bank margin boost on technology initiatives: Efficiency ratios dip lower (that’s a good thing) for firms like Bank of America amid their continued push beyond cash and into tech. Breaking the 50 percent efficiency ratio barrier might just be a structural change afoot.
Plastics: One word: plastics, echoes the old movie The Graduate. But for Amex, linking up with firm Parley, the meaning is broader, with a pact to launch a card made from plastics recovered from oceans and coasts. Could there be a ripple effect in going green as people are spending green?
Fast food workers: Perhaps to be an endangered species, as BLS estimates 80,000 fast food jobs will be gone by 2024, scuttled on the heels of automation. If you want fries with that, you may need to speak clearly to the robot.
Bitcoin: Pricing cracks below $6,600, amid news of U.S. probes and a hack on a South Korean exchange. We are a long way from $20,000. Oh, and reports said that whole huge run-up last year was tied to market manipulation. Bit by bit, the news has been bitter for bitcoin.
Medical marijuana biz dreams – up in smoke? Research shows it costs a lot to get a pot business off the ground, to the tune of $4 million to $6 million. And no banking services? That means no loans. It’s not easy to take up the toke.