John Zolidis on top retailers signaling economic distress

The market is focused on tech, but consumer spending is still 2/3 of the U.S. economy.

I am not a fan of making macro-economic predictions.  Some of the smartest people I know who try to do it are basically always wrong.  However, as a consumer sector specialist, I am close to retailers and restaurant companies.  Their reports provide an important window onto the single largest segment of the U.S. economy.  This in turn lets me pretend I have some insight into the macroeconomic state of things.  Last year, what we saw was weakness develop in the lower-income consumer cohort.  Higher prices (inflation) for basic goods and services were a problem, and any excess monies saved during Covid had been spent.  Outside this group, further up the income spectrum, the balance of the country kept spending.  Last year’s concern was that weakness would eventually leak into more of the consumer base.  This didn’t happen.  The 2023 Holiday season was solid, resumed student-loan payments be damned. 

2024’s early signals are decidedly squishier.  A 1,600-store chain of low-priced discretionary goods, Five Below (FIVE) recently reported that the year had started “soft”.  Lululemon (LULU) later said the same thing.  Then, last week, retailer Ulta Beauty (ULTA) messaged a deeper-than-expected slow-down in the category.  What’s noteworthy about these three retailers is that they all had better-than-expected 2023 revenues.  LULU serves a high-income consumer.  The beauty category had been among the strongest segments in all of retail.  FIVE was seeing accelerating transactions through most of the year.  We can add these signals to already entrenched troubles at footwear retailers, home improvement superstores, car wash operators and the sales of discretionary products at mass retailers among others.  Worrisome?  Maybe rate cuts will save us.

~ John Zolidis, "That Irritating Noise Being Ignored is Sound of Favorite Consumer Companies Signaling Distress," Quo Vadis Capital, April 8, 2024