By Sabrina Escobar
It's looking like a jolly holiday season for America's retailers, based on company guidance and economic forecasts. That's because many U.S. consumers are in good financial health on the eve of the greatest shopping marathon of the year.
At least 10 retailers recently raised their sales or earnings guidance for the current fiscal year to reflect continued spending, including Walmart, Gap, TJX, Ralph Lauren, BJ's Wholesale Club Holdings, Home Depot, and e.l.f. Beauty.
"We feel really confident, as you can see by our guidance, in terms of what we expect both this holiday season and beyond," said Tarang Amin, CEO of e.l.f., on a call with Barron's after the company reported a 40% jump in September-quarter sales.
The National Retail Federation, an industry trade group, predicted earlier this year that sales in November and December would rise by 2.5% to 3.5% year over year, below both the five-year average of 6.7% and last year's gain of 3.9%. That forecast now seems too conservative.
Americans are still grappling with inflation and high interest rates, and the calendar is unfavorable this year. Thanksgiving falls late in the month, shortening the holiday shopping period by about five days compared with most years.
But real wages, adjusted for inflation, are on the rise, boosting consumers' purchasing power. And wealthy households, which account for the bulk of consumer spending, are benefiting from stock market gains and continued home-price appreciation.
"A positive income effect and positive wealth effect set up well for the consumer going into this holiday season," said Stephen Juneau, senior U.S. economist at BofA Securities.
Improved Sentiment
One thing is clear: Americans are finally starting to feel better about the economy. The Conference Board's consumer confidence index recently notched its strongest monthly gain since March 2021, while the University of Michigan's latest monthly Survey of Consumers, released on Friday, reached its highest level in six months.
Positive sentiment typically correlates with a propensity to spend, although that wasn't the case in the past two years. Consumers upped their spending during the holiday season even though pessimism about inflation had dragged sentiment readings down to their lowest levels in decades.
This year, sentiment and spending could be more aligned. "If we are getting improved sentiment with really healthy spending, that's like kindling for the fire," said Scott Helfstein, head of investment strategy at Global X.
The biggest improvement in sentiment has occurred among higher-income consumers, who have benefited from a record-breaking bull market and house-price appreciation, said Joanne Hsu, director of consumer surveys at the University of Michigan. Wealthier households tend to drive the bulk of discretionary spending, and are revving up to shop between Thanksgiving and Christmas.
A TransUnion survey of 3,000 Americans found that 73% of higher-income shoppers were planning to spend the same amount as last year, or more, this holiday season.
Wealth increased by 37% from 2019 through 2022, according to the Federal Reserve's latest Survey of Consumer Finances. That marked one of the fastest accumulations of wealth in decades, said Wayne Best, Visa's chief economist. Strong stock and housing markets had a lot to do with the increase, but income gains also contributed, and continue to do so.
In this year's third quarter, real disposable personal income rose by 1.6% from the prior year, while the savings rate was 4.8%. More important, the Bureau of Economic Analysis recently revised higher first- and second-quarter data, suggesting that consumers are on more solid footing than economists expected at the start of the year. Real DPI for the first quarter was revised upward by 4.3 percentage points, or about $225 billion, to show a gain of 5.6% year to year.
These revisions helped prompt some economists to lift their holiday forecasts. Best tweaked Visa's holiday outlook in October -- to an estimated increase of 4% from a prior 3.8%.
"We had a hard time understanding how spending could be so strong in the first part of this year," Best said. "Then the government revised its disposable-income numbers -- both nominal and real -- substantially. Those were some of the biggest revisions I have seen in years. And now, all of a sudden, it makes sense."
To be sure, inflation remains a problem for many shoppers. Consumer prices rose 2.6% in October on an annual basis, and are up more than 20% since 2019.
Inflation and interest rates are taking a toll on Victoria Harris' holiday plans. Harris, a barista in Colorado Springs, Colo., says she wants to splurge on gifts for her two young children, but her budget has been whittled away by higher grocery prices and payments on her car loan. She plans to cap her spending at $200 this year.
"It's hard going into the season knowing that we can't afford what we would like for Christmas," Harris said.
Rising household debt is also a concern. It swelled to $17.9 trillion in the third quarter, according to the Federal Reserve Bank of New York. Delinquencies on debt payments have ticked up, particularly among lower-income and younger consumers, and the share of loans in some stage of delinquency edged up in the third quarter to 3.5% from 3.2% in the second.
The delinquency rate could rise further in 2025, as credit bureaus start reporting missed student-loan payments again. The 2020 repayment hiatus ended in October.
A cooling labor market could compound consumers' worries -- if it continues. The pace of hiring has slowed this fall, and the unemployment rate was 4.1% in October, up from a low of 3.4% last year.
Still, most economists don't expect the job market to roll over, and income growth is far outpacing the rise in debt, so far. Household debt totaled 82% of income in the third quarter, lower than in 2019.
Economic data paint a broad-brush portrait of U.S. consumers, but the behavior of individual shoppers is more nuanced.
Lacey McCormack, who has a part-time job in digital marketing, says she is taking a conservative approach to holiday shopping this year because she's saving up to buy a new house in Kansas City, Kan. She also says she is trying to spread out her spending through the season, looking for deals, and paring down her shopping list.
Yet, McCormack says she's still planning to spend a good amount for the holidays. With gifts for her son, husband, and extended family, her budget could range from $850 to $1,125.
Holiday Stocks
Like McCormack, there are millions of consumers itching to spend this holiday season, especially if the price is right. Companies that cater to consumer demand for value and convenience will come out on top, analysts say.
"For yet another year, we would call out the strong competitive positioning of the off-price channel, the membership club model, and Amazon, which are all still likely in the middle innings of a decadeslong runway for expansion," wrote Sharon Zackfia, an analyst at William Blair.
Zackfia's team polled 585 people about their shopping preferences. Roughly a third ranked Walmart as their top retailer for gift-buying, followed by Amazon.com at 25% and Costco Wholesale at 21%. Off-price companies, such as TJX, Ross Stores, and Burlington Stores, were also popular.
The problem for investors is that the shares of these companies aren't cheap. All trade for more than 20 times next year's earnings, well above the average of about 14 times for the SPDR S&P Retail exchange-traded fund. Bulls say the premium is worth it because all of these companies have been doing well.
Investors looking for a better deal may want to scout the small- and mid-cap aisles, where valuations tend to be lower. Dick's Sporting Goods, Ralph Lauren, Tapestry, Nordstrom, and Abercrombie & Fitch are among the stocks favored by Dana Telsey, CEO of Telsey Advisory Group. All five companies have delivered steady revenue and earnings growth in recent quarters, and could continue to do so in 2025. And, all five trade for under 20 times earnings.
"Retailers who offer unique or differentiated product with a good value proposition can see better trends and better traffic, particularly as consumers remain discerning with their spending," Telsey wrote.
Happy holidays to them, and to all.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 22, 2024 17:18 ET (22:18 GMT)
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