Retail Numbers Are Out, But What Do They Mean?

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  • 07 mins 27 secs
Sarah Wyeth, Retail & Consumer Sector Lead, S&P Global Ratings breaks down the most recent retail growth figures, analyses sector trends, and shares her outlook for the next 12 months.
Channel: Markets

This is your view from the floor from the New York Stock Exchange. I'm joined by Sarah WTH, a retail and consumer sector lead for S and P global ratings. Sarah, thank you very much for joining us today.

Thank you for having me, John. Nice to be here. Sothe retail sales numbers just came out for April and they rose by 0.4% which is about half of what was expected. Uh This is the first positive growth number in the the last three months. So is this a good thing? Bad thing because we're finally the positive growth, but it's short of expectations. So where does this put us and what are the main factors playing into those numbers right now? So John, the biggest factor is that consumers have been facing intense inflation for more than a year now. And now they're starting to see other pressure on their budget in terms of financing costs like mortgages cars, their debt service on their credit cards. So all of this is adding pressure to their financial position. In addition to that, you've got excess savings which is still above pre pandemic levels, but it's down from the peak by half. So what we're basically seeing is a deterioration in, the financial position of consumers not falling off of a cliff. But it's certainly in the normalization range. And the question really is, is that, does that trajectory continue to fall?

And what is your outlook there? Because a few months ago when people were first started talking about the possibility of a recession, everyone was saying, oh, the American consumer is in a very strong position. So what is your outlook there?

So we expect a very mild recession, 2nd and 3rd quarter, the mildest recession since 1960. And that's largely because of the strength of the consumer. My personal opinion is that there's that with the, as long as the jobs market is good, consumers are going to be more resilient as they have shown. And are there any areas within retail that are doing particularly well or particularly poorly? And were there any surprises this earning season? So particularly poorly or particularly weak where we're seeing the most weakness would be discretionary categories, apparel, also home categories, home improvement. We saw Home Depots guided down with their recent results. The Container Store, another home product company down 4% for the quarter. Those categories did really well during the pandemic as consumers had extra savings, extra cash and they needed somewhere to spend it because they couldn't go out. Now we're seeing that come back down to earth and it's, you know, it's fine as it should be. But there's also the additional pressure in housing, the broader housing market making adding pressure to players like Home Depot uh area of relative strength would be um that was the question, right? Sorry area of relative strength would be um value. So off price dollar stores, they're benefiting from the middle consumer that's being squeezed trading down. And then at the upper end luxury, those consumers are less, ess impacted by the inflation are more resilient tapestry, essentially coach reported recently. And despite the fact that they did talk about sequential weakening during the quarter, which you know, makes us, we're, we're going to be watching closely that consumers is doing pretty well. There's another interesting area that we've been getting a lot of questions on and that is auto parts aftermarket retailers. So o'reilly, for instance, reported sales up 11% and that's because people are driving their cars more. The average age of a car is lengthening because new and used cars are so expensive right now. And when there's pressure on the consumer, those retailers tend to do well as people do more of their maintenance on their own.

 And consumer sentiment came down in May uh lower than expected and the lowest since November of 2022. So how closely correlated are uh retail sales growth numbers and consumer sentiment numbers?

They are not very, they're not highly correlated to be blunt there. Certainly, for us, it's like a warning sign, but essentially consumers say one thing and they tend to do another and there's a lot of theories as to why that is. But you can see in the retail numbers, they're not the worst that they've ever been. They're still way above where they were pre pandemic. So it's more of a kind of a warning sign for us and it just adds to the story of the consumers weakening. How much more are they going to weaken? And are there any trends or changes to consumer behavior you mentioned earlier, that kind of middle market consumers are trading down? Are there any other uh behavior uh changes from the consumer that investors should be looking out for? I think we're going to see more of the same trade down, deferral of discretionary spending, a shift of spending to experiential where they, where they do have, they do want to spend discretionary. A lot of it is going to experiential. So travel and restaurants, but generally more of the same as consumers are likely to continue to tighten their belts.

And what are some key things that you're watching out for right now?

So given the difficult operating environment and the choppy financial markets, we have a larger growing number of credits in the triple C category. And the triple C category implies there's a one in two likelihood of a default. So the fact that that number is growing bodes to more defaults going into the in the future, in the near future. And this is largely typically due to liquidity, approaching maturities that are going to be very difficult to refinance it. Given the markets, most of the issuers in this category are in the C range are in the categories that we talked about those weak categories. And then there's also several others that have had a very high debt load for a long time and it's extremely hard to dig out of that now.

And finally, what is your outlook for, for retail for the next 6 to 12 months?

So our outlook, our ratings outlook, we have a 20% more than 20% of our ratings have a negative bias. So that is essentially looking forward. There's a likelihood of additional downgrades and it's largely in these, these categories that we've talked about. The discretionary is going to be very difficult and on the bottom line margin pressure, although it's abating in some areas, for instance, freight wages are still applying a lot of pressure on the bottom line, so that's going to continue. So it's relatively negative going forward. Well, Sarah, thank you very much for sharing your insights today. Thank you, John. Nice to be here and our audience can't tell, but it smells like lunch out here. So looking forward to mine.

Thanks for watching Asset TV. I'm Jonathan Forsgren, we'll see you next time.

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