- In February, the Bank of England said it expected consumers to start spending their lockdown savings once the economy reopened.
- Amazon reported better-than-expected quarterly results in April, helped by its booming ecommerce business.
- Department store chains Kohl’s, Macy’s, and Target all announced solid quarterly updates in May.
- And retail giant Walmart also wrapped up last quarter with surprisingly strong earnings.
✍️ Connecting The Dots
One side effect of the pandemic was an increase in the “savings rate”: the proportion of people’s disposable income they stash away rather than spend. This makes some sense: even if your income took a hit last year, the reduced retail and leisure options on offer meant you’d struggle to spend much on anything beyond the essentials.
That led to some $5.4 trillion of supernormal saving in the US alone – and analysts, central bankers, and economists all expected a global spending boom as economies reopened and constrained consumption was unleashed. This is essentially what’s started to happen: consumers have willingly opened their wallets and spent big on everything from the high-end to the low.
Luxury goods companies like Burberry have benefited from a resurgence in Asian consumer spending – and in raising their earnings forecasts, they’re betting that this trend will spread to the West as the year rolls on. Home improvement stores like Lowe’s and Home Depot have also done brisk business, partly thanks to surging real estate prices encouraging owners to spruce up their homes. So too big-box retailers like Walmart and Target. Some analysts, however, now worry that this free-for-all is too good to last…
1. Watch jobs data for clues about retailers’ fortunes.
Retailers and brands by and large expect the good times to keep rolling a while yet. But April’s US jobs report was weaker than expected, which is important for two reasons. First, if people aren’t finding jobs, they’re unlikely to feel confident spending any money they’ve got saved. Second, wages tend to increase in line with employment – and with the prices of goods and services rising at recent-record rates, people will likely need larger pay packets in order for their spending to keep up. Otherwise it may simply stop, with big retailers and brands – not to mention their shareholders – losing out.
2. A race to the bottom hurts profit margins and dividends.
Between the growth of ecommerce and rising competition from “private label” brands, some retailers – particularly grocers – are locked in a race to lower prices and keep as many customers as possible. As an investor, one thing to consider closely before buying into a retailer is the direction of its profit margin. After all, even if sales are growing fast, it’s a company’s profit which dictates the level of its dividend, and a shrinking figure could wind up reducing both your income and the value of your shares.
🎯 Also On Our Radar
So-called “meme stocks” like GameStop and AMC Entertainment are back in vogue, with the latter up over 100% last week alone. The jumps are reminiscent of earlier this year, when retail investors appeared to club together to bet on certain stocks rising, sending their prices “to the moon”. While last week’s rallies weren’t as big, it’s a reminder to analysts as well as institutions that retail investors’ influence in markets isn’t to be underestimated.