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“We have been saying for quite some time that China is a resilient consumer.”
This was the comment Target (TGT) CEO Brian Cornell made to me on earnings day. That came with his shout-out that he spent $500 million in cost cuts last year ($1.5 billion is the long-term goal). I happened to mention that the day before the interview, I bought Beyond Meat (BYND) meatballs from my local Target.
We laughed, carried on, and then went home that day to monitor overseas markets.
But Cornell’s observations about shoppers struck me. First, his point is correct. Second, it goes a long way toward understanding why the Fed pushed back on the market theory that it would cut rates five or more times in 2024.
Judging by the health of American consumers, the economy’s biggest driver, the economy doesn’t need these aggressive cuts.
Employment statistics for February released on Friday were also strong, with an increase of 275,000 people. Wages have risen and prices have fallen. The stock market is doing great, and households with stock portfolios feel better off (also known as the wealth effect). Consumer confidence fell slightly last month, but it hasn’t fallen off a cliff for some reason.
“Consumers are shopping,” Cornell added, noting that Target’s store foot traffic improved in the fourth quarter compared to occupancy rates seen through much of 2023.
EY economist Greg Daco said there are several reasons why consumers are upbeat, including a resilient labor market and strong household balance sheets.
“The post-pandemic rise in the value of talent has made business owners even more reluctant to part with their valuable talent pool, despite expected cost pressures and slower end-demand growth,” Daco said. explained.
“Sturdy employment growth and solid wage growth have led to solid growth in real disposable income, which has enabled consumers to continue to pay higher prices for goods and services.”
Mr. Market, of course, had sniffed out all this.
The VanEck Retail ETF (RTH), whose top five stocks include Amazon (AMZN), Home Depot (HD), Costco (COST), Walmart (WMT), and Lowe’s (LOW), is up 9.2% since the beginning of the year. compared to his 6.5% rise in the S&P 500 (^GSPC). According to one of my nifty Yahoo Finance screeners, Home Depot and Lowe’s stock prices hit 52-week highs this week.
And against this resilient (though not gangbuster) backdrop, the winners and losers in retail are becoming very clear. Consumers don’t have unlimited money, but those who do have discretionary money spend it where they care.
Abercrombie & Fitch (ANF) posted an impressive 21% revenue increase in the fourth quarter. CEO Fran Horowitz (video above) said the chain continues to take market share among people in their 20s to late 30s. Rival American Eagle Outfitters (AEO) saw sales increase 12% in the holiday quarter compared to the same period last year.
Gap, a staple of struggling malls, is starting to turn things around, with both Old Navy and Gap brands posting year-over-year growth in the fourth quarter. CEO Richard Dixon told Yahoo Finance that the company gained market share during the quarter.
Target and Walmart had strong fourth-quarter results in discretionary categories such as home goods and clothing.
Meanwhile, the losers are really losing.
Foot Locker (Florida) and Victoria’s Secret (VSCO) had terrible quarters, with the market dropping their stocks more than 30% in a single day this week.
Nordstrom (JWN) warned that sales trends will remain weak for its full-price banner. Macy’s (M) had a bad quarter.
“Customers have a choice, and they’re choosing us,” Horowitz said.
The Fed also has a choice on interest rates, and given consumer resilience, the Fed’s choice should become easier in 2024.
Brian Sozzi I’m the executive editor of Yahoo Finance. Follow Sozzi on Twitter/X @BrianSozzi And even more linkedin. Have a tip about a deal, merger, activist situation, or more? Email brian.sozzi@yahoofinance.com.
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