Key Points:
- May CPI and the CNBC+NRF Retail Monitor for May were better than expected. However, we suspect that the underlying trends are less benign than these reports suggest.
- Commentary by retailers at several investor events over the past week suggests a spending environment that is largely consistent with FQ1, save for a weaker trend at the “bottom-of-the-K.”
- Should you want to talk about any of this, send me an e-mail.
Last week’s note previewing May retail sales (The slowdown continues) suggested that higher diesel prices and surcharges were feeding through to higher food inflation and driving up the average check size at general merchant, club, and grocery retailers. However, this week, we got conflicting data on that call, as well as on our “slowdown” viewpoint. Core CPI (+0.2% MoM) and food-at-home (+0.2% MoM) were more benign, and the CNBC + NRF Retail Monitor for May was a stunning+7.2% YoY. Wow! What did we miss? First, several of the Monitor’s categories seem unreasonably robust and conflict with our data and this week’s company commentary. The “high” categories are Electronics & Appliance stores (+12%), Clothing & Accessories stores (+10%), General Merchandise stores (+8.3%), and Grocery (+6%). Best Buy trends in Advan observed* ticket (+2.2%) and traffic (-0.8%) are modest relative to the +12% reading. April PCE for appliances increased +4.1%; we don’t believe that it gapped up in May.
Turning to clothing & accessories, Gap and Old Navy’s traffic were flattish for May. This week, we attended Evercore-ISI’s Consumer Conference and on clothing & accessories brands, its analyst wrote, “The US consumer remains more resilient than headlines suggest, with spending holding up despite inflation concerns, though shoppers are increasingly gravitating toward either value or highly differentiated brands.” Said differently, none of the management teams in clothing & accessories indicated anything close to +10% category growth. Per Advan’s data, for May, Marshall’sticket (+1.0%) and traffic** (+2.0%), were +3.0% combined and far less than +10%. Another example, Lululemon’s Americas comps declined -6% for its FQ1, i.e. very not +10%-ish.
+8.3% is a monster figure for the general merchandise category; Walmart’s observed ticket (+1.9%) and traffic (+0.4%) were more modest***. From Walmart’s Associates’ Week, Goldman wrote, “Per management, consumer behavior has changed quite a bit, noting that at the pump, gallons per trip has declined from 11 to 9.” We didn’t see any sell-side research notes indicating acceleration from FQ1 (+4.1%). Target also met with investors and analysts this week; Evercore-ISI wrote, “Management highlighting strong 1Q performance (+5.6% comps) was driven by broad-based traffic growth and successful merchandising, inventory, marketing, and loyalty initiatives rather than just tax refund benefits. While comps are expected to moderate from 1Q levels, management noted continued momentum, including some inventory shortages due to stronger-than-expected demand. The company remains focused on driving traffic through store investments, competitive pricing, and customer engagement…” For Target’s May, the observedticket (+1.5%) and traffic (+1.4%) combined were +2.9%, again far less than +8.3%.
On grocers, Albertson’s message at the Evercare-ISI event was that conditions have worsened (i.e. its market did not grow +6% in May). UNFI reported very soft comp results (-4%) for its Cub business. We’ve seen several research notes lowering the sales outlook for Ahold’s US business for the quarter (which includes May). Campbell’s reported very soft volume (-5%) for its fiscal quarter and indicated more of the same for the current quarter. Given the pressure on profits, Campbell’s has ceased buybacks and dividend increases. Scanner data for May (NielsenIQ) estimates that non-produce sales increased +1.8%. To conclude, neither the grocery industry nor the category is growing +6%.
Back to CPI, apparel prices accelerated (+4.8% YoY and vis-a-vis tariffs), which would have impacted the average check size for Walmart and Target, and so that’s one driver. Prices for sporting goods (+4.4%) is another higher-inflation category. We suspect that the strong demand for toys & collectibles is also driving up the ticket in general merchandise retail and specialty retail. Additionally, final demand PPI increased +6.5% YoY for May, after two large +1.1% MoM increases for April and May. And so, we’d judge our viewpoint of CPI worsening as early, and with different and longer-lag contributors than we suspected.
To conclude on the big picture, we still expect May and June non-essentials* retail sales (Census Bureau’s report) to point to a softer trend vs. March / April (+6.7%), but to still demonstrate that retail and consumer expenditures are contributing to real economic growth. Earlier this year, with March / April retail sales, we characterized the US consumer as “remarkable.” We’d also characterize the rate of core retail sales growth in May / June as remarkable, given that: (1) housing is so frustratingly stuck (and not contributing to retail growth, see RH’s results), and (2) the bottom-of-the-K has less to spend on non-essentials given higher gas prices’ “grab” of wallet-share.
