U.S. consumers continue to limit spending amid growing concerns about the health of the U.S. economy, putting further pressure on the retail sector. With growing economic uncertainty surrounding interest rates, inflation, and a possible looming recession, we’re sticking with retail holdings like TJX Companies and Costco Wholesale that offer both quality and value to shoppers. Retailers’ first-quarter earnings results this season showed that weaker discretionary spending is the biggest hurdle facing businesses in many retail categories. Home improvement retailer Lowe’s Companies (LOW) reported weaker than expected sales on DIY purchases in its fiscal first quarter results. Similarly, Home Depot (HD) posted its biggest revenue loss since November 2022 during its first quarter, due to weaker demand for the most expensive items. Sales at Target (TGT) were subdued in the first quarter, while at Walmart (WMT), consumers opted for lower-priced items and bought fewer discretionary goods. Holding club Foot Locker (FL) delivered disappointing first-quarter results as the weakening macroeconomic picture put a damper on CEO Mary Dillon’s turnaround strategy. “The consumer is weaker everywhere,” Jim Cramer said Tuesday. What Jim calls “consumer cracks” are the result of the Federal Reserve’s policy of aggressive interest rate hikes over the past year to rein in persistently high inflation. “If the Fed is waiting for the consumer to weaken, stop waiting,” Jim said. On the one hand, a weaker consumer — in most sectors except travel and leisure so far — is exactly what the Fed has hoped to achieve through its efforts to cool the economy. Coupled with inflation showing signs of easing in recent months, the central bank may be able to at least suspend rates at its next meeting in June. That, in turn, could boost stock markets, which have been held back by higher rates. But it’s a fine line to walk. If consumer spending declines too precipitously, it could help tip the US economy into recession. And that would, of course, be negative for the markets. So, when it comes to the retail industry in this uncertain economic environment, we are focusing on retailers that offer quality merchandise at attractive prices, with Costco Wholesale (COST) and TJX Companies (TJX) being the main ones. of them. TJX — which operates stores like TJ Maxx and HomeGoods — announced its fiscal 2024 first-quarter results last week. While the off-price retailer reported weaker sales, cutting costs such as transport enabled the company to increase its earnings per share by 12% on an annual basis. Overall, TJX had a strong quarter as it continued to deliver value to budget-conscious consumers by selling high-quality inventory at low prices. Rival Ross Stores (ROST) has also shown resilience in its recent results with sustained sales in line with Wall Street expectations, even as management took a cautious tone on the state of the economy. Costco is expected to release its third-quarter fiscal 2023 results on Thursday after the closing bell. The wholesale retailer’s monthly comparable sales reports showed Costco shoppers are cutting back on discretionary items and prioritizing consumer staples. But Costco saw sales climb 1.4% in April, compared with a 1.1% decline the previous month – a sign that it is likely in a stronger position than its counterpart BJ’s Wholesale Club Holdings (BJ ), which on Tuesday reported weaker-than-expected comparable sales, excluding gasoline, in its first quarter. Bottom line There are several factors that are stacked against consumers right now. With inflation still high, the Fed may see the need to continue raising rates. Such a move, in turn, could force consumers to tighten their purse strings further and weigh on the overall economy. But if the Fed decides to pull back and suspend rate hikes later this year, the pressure on the market – and the consumer – could ease. In the meantime, our strategy is to stick with retailers like TJX and Costco that offer great value to consumers, while effectively managing inventory. (Jim Cramer’s Charitable Trust is long FL, TJX, COST. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS, OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Shoppers wait in a line at a Costco wholesale store in Orlando, Florida.
Paul Hennessey | Sopa Pictures | Light flare | Getty Images
U.S. consumers continue to limit spending amid growing concerns about the health of the U.S. economy, putting further pressure on the retail sector. With growing economic uncertainty surrounding interest rates, inflation, and a possible looming recession, we’re sticking with retail holdings like TJX Companies and Costco Wholesale that offer both quality and value to shoppers.
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