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Market Insights

The murky US retail picture

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US headline retail sales were flat last month, with July showing a 0% increase vs June. However, this is yet another data point that’s harder to interpret in an inflationary environment. It’s a big old mess and some of the naturally optimistic CEO commentary doesn’t help.

Wells Fargo published an excellent report explaining the retail sales weirdness:

Retail sales were flat in July, but after adjusting for sharply lower prices of some goods, particularly gasoline, real retail sales actually rose 0.6%, the first volume gain in three months. E-commerce notched a solid gain, perhaps lifted by Prime Day.

Amid constant headlines about the highest inflation in 40 years, there is an overlooked and counterintuitive fact that puts the July retail sales report into context: goods prices were actually down 0.5% in July, according to the already-released CPI report. Today, we learned that July retail sales were flat for the month, but the fact that goods prices were down means people actually got a little more for their money in July.

We expect the staying power of the consumer to last into August before a sharp spending retrenchment takes hold this autumn.

A lot of the big retailers reported earnings this week. Let’s take a look at Target, the second largest retailer in the US. Their operating margin dropped to just 1.2% (vs 9.8% a year ago). What’s the biggest driver though? Is the US consumer under pressure, or is this due to excess inventories?

According to Target CFO Michael Fiddelke “The vast majority of the costs to get our inventory where we wanted it are behind us ... we're well positioned to see improved profit performance in the back half of the year"

Inventories actually grew by 1.6% in the quarter (to $15.3 billion). CEO Brian Cornell said this was due to back to school and holiday stocking.

The stock has risen over the past few days…


Having prepared markets for the worst in the prior quarter, Walmart upgraded their annual profit forecast slightly. Fiscal 2023 adjusted earnings per share are now expected to fall 9-11% instead of the prior 11-13% range.

CFO Rainey noted that customers were starting to adjust their spending choices.

"Instead of buying maybe deli meats or beef, they're trading down to things like canned tuna, chicken and, even, beans. We're seeing the same thing in the quantity, where they're trading down for smaller pack sizes that are more affordable. So instead of buying 12 items to buy six items in a pack,"

"We expect inflation to continue to influence the choices that families make, and we're adjusting to that reality,"

Revisiting our pick for stock of the week, Home Depot jumped after reporting larger than expected comparable sales growth of 5.8% in Q2.

Home Depot

CEO Ted Decker summed the results up

"In the second quarter, we delivered the highest quarterly sales and earnings in our company's history,"

"Our performance reflects continued strength in demand for home improvement projects. Our team has done a fantastic job serving our customers, while continuing to navigate a challenging and dynamic environment. I would like to thank them and our many partners for their hard work and dedication to our customers."

He also noted strong and steady demand from professionals and DIY customers. Despite the inflation fears, it seems like there’s still consumption and spending in the economy. Will it last?

Not investment advice. Past performance does not guarantee or predict future performance.

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