Key Points:
- Observed traffic (per Advan) in July using the NRF calendar was broadly stronger MoM, lifting FQ2 slightly above FQ1’s rate. That reflects a consumer spending backdrop that has largely remained similar despite the discombobulation in the Middle East.
- The most significant change for Q2 is a more pronounced K-shaped economy, but “thriftiness” is still in vogue, leading to very strong traffic for July at Target, Costco, and Sam’s. Additionally, treasure hunt retail also remains in vogue, but it’s starting to lap last year’s significant gains resulting in some growth moderation.
Pulling it all together ahead of retailer FQ2 earnings, we observe that: (1) Q2 GDP / PCE accelerated to +6.5% / +6.2%, which was driven by good breadth and more volume, (2) the earnings from AXP / V / MA and the credit card houses indicated that spending trends were broadly consistent QoQ, perhaps a touch better, (3) the K has further extended (Q2 European luxury results in the Americas region accelerated +270bps QoQ, whereas P&G, Colgate, Albertsons, and Ahold all pointed to a more challenged lower-end consumer), (4) housing is still a drag, but employment is looking more favorable, and (5) interest rates are a drag, but the wealth effect is rich. In terms of other relevant news, we expect July retail sales* to accelerate from June’s rate (if not in the first release, then by the revision). We also point readers to our recent stories on Amazon, Albertsons, and dining.
We also observe that traffic for:
- General merchants accelerated* by 110bps FQ2 / FQ1, led by Costco and Sam’s. We expect Costco to report very strong traffic for July. Sam’s strong July likely lifts FQ2 reported comp-transactions above FQ1’s rate of 6.2%. Importantly, we observe soft average tickets across Walmart, Target, and Sam’s as all are leaning into price to demonstrate greater value to shoppers and drive traffic. This competitive dynamic, plus a similar pricing strategy by Amazon, is upsetting conventional grocers and the like (and suppliers), but that what they said they’d do on their FQ1 results calls and in their PR. Lastly, Target’s traffic for July was gangbuster, increasing at nearly 2X the FQ2 period’s rate.
- Dollar stores accelerated by 40bps, but unlike general merchants, average ticket accelerated. The acceleration should be from inflation and UPTs. We take the increase in UPTs to reflect an increase in the affluence of the dollar store shopper. YoY, the median HHI of the Dollar General shopper increased +0.7%. If these shoppers spend 3X more than less affluent, that lifts the average ticket by +2.1%.
- Treasure Hunt retail decelerated modestly QoQ; performance was once again led by Ross, observed traffic +8% (per location), followed by Burlington at +6%. FQ1 also benefited from tax refunds; that’s less of a boost to FQ2. Our take on the increase in the comp ticket for FQ4 / FQ1 was favorable mix due to the intentional merchandise strategy to push into higher-end brands and the discombobulation at Saks and Neiman. FQ2 appears to no longer enjoy that extent of lift as Ross and Burlington are now lapping the push. Next, given increases in observed dwell-time across the board, led by Burlington, we expect an conversion rate and UPT to be contributors to the comp once again. Five Below’s observed traffic continues to be spectacular (+6% per-location) and we expect its conversion rate and UPT to improve as well. Five Below is lapping some very difficult comps (FQ2’25 comp ticket / transactions +3.4% / +8.7%). If we assume +750bps from conversion and 100bps from ticket, Five Below would produce a 14% comp-sales increase for FQ2, i.e. a monster gain once again (FQ1 was a +23% comp).
- Shopping malls overall enjoyed a FQ2 +1.4% increase in observed traffic, a favorable backdrop for apparel and department store brands. Of note, the July retail period ended on an exceptionally strong note with traffic up double-digits, swung higher by Spider-Man: Brand New Day.
- Home improvement should report FQ2 DIY comp- results similar to FQ1’s. (See our preview on MRO and HDS here.) As shown in traffic, May was quite soft for Lowe’s and Home Depot; Census MRTS was +1.8% for the month vs. +3.6% in April. June was much improved, and July should be similar. And so, all together similar DIY results QoQ.
