Costco is always a great tell on things as their customer base spans the various demographics. In their earnings call they said “Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the US, impacted in large part from weakness in bigger ticket non-foods discretionary items.”
More on where the weakness was, “big ticket discretionary departments notably majors, home furnishings, small electronics, jewelry, and hardware, were down about 20% in e-comm and made up 55% of e-comm sales. The same departments were down about 17% in warehouse but they only make up 8% of warehouse sales.”
What are people buying? “They’re buying non-discretionary items, they’re buying fresh foods, they’re buying food and sundries, they’re buying apparel in a big way, they’re buying patio furniture, now that the weather has turned in a big way, indoor furniture not as much.”
On pricing, “inflation continues to abate somewhat. You go back a year ago to the fourth quarter of ’22 last summer, we had estimated at the time that y/o/y inflation was up 8% in Q1, and in Q2 it was down to 6% and 7% and then 5% and 6% and this quarter we’re estimating that y/o/y inflation in the 3% to 4% range.”
On inventories, “Inventories overall are in pretty good shape. As of quarter end, our inventories y/o/y as of the end of the third quarter were down 7%. Recall that they had been up during some of the supply chain challenges of last year.”
Here was Dollar ($1.25) Tree said yesterday in its call:
“In addition to the historic levels of inflation and labor market challenges, retailers have seen in just the past quarter elevated levels of shrink and even further pressure on the consumers’ willingness to spend on discretionary goods. Shrink and the mix-shift from discretionary goods have pressured margins throughout retail. We are no exception. Ultimately shrink will either be resolved through defensive merchandising, store closures and/or through government action at the local level.”
“the consumer continues to be under pressure. There are simply fewer dollars available to them and those dollars are not going as far as they did a year or two ago. We are past the multiple rounds of government stimulus, SNAP dollars have been reduced and tax refunds are running lower. These impacts combined with persistent inflation have more families prioritizing needs over wants.”
Let’s shift to the always colorful Gary Friedman, CEO of RH, and the more upscale product lines he sells:
“With 30 yr mortgage rates trending at 20 yr highs, the possibility of continued economic tightening required to tame inflation, and uncertainty regarding the recent regional banking crisis, we expect luxury housing markets and broader economy to remain challenging throughout fiscal ’23 and into next year.”
“Based on the above and current demand trends, we are now forecasting increased markdowns to clear discontinued inventory required to support our product transformation over the next several quarters.”
To the question on what they’ve seen in the business over the past couple of months:
“I think what we’ve seen is an increase in headwind from a demand point of view and a slowing of our cycling through our discontinued inventory as we’ve increased our markdowns to begin to cycle through this product to be prepared to move the old product out and bring the new product in.”
As for the backdrop that they are bringing this product in, “We’re launching it into maybe the worst home environment at the high end that I’ve ever seen in my career. I’ve never seen luxury housing down at the levels we’ve seen from recent reports…So there’s some level of caution.
Finally from Gary, “If you ask me what I’m most worried about. I’m most worried about what’s next in the world of regional banks, which could have a further impact on a lot of things, lending to small businesses, the economy, supporting innovation, and invention, massive tightening of credit, more banks to get fees, government have to get more involved, and just general uneasiness by the consumer…I think it’s a good time to pray for peace and plan for war, and so that’s how we’re kind of positioned.”
Moving overseas, Tokyo said its May core/core inflation rose 3.9% y/o/y as expected and up one tenth from April. While now double the BoJ’s long term target, yesterday Governor Ueda has remained still very dovish saying “We haven’t reached Japan’s inflation target sustainably and stably.” No definition here of what ‘sustainably and stably’ means. Ueda also said “I’m well aware that inflation has become a major burden but the rise in energy prices is starting to subside, and the rate of increase will come down going forward.” He seems more worried about the impact from tightening policy, “The tightening effect will be added on top of the decrease in prices, and it will have a significant negative impact on employment and other areas.”
There has been a rather sharp rise in the 10 yr inflation breakeven in Japan and it touched .985% overnight, the highest in almost a year. On the in line CPI print the yen is up along with most currencies vs the dollar this morning. I do believe Ueda will widen YCC again at one of the next two upcoming meetings because if not now, when if ever?
10 yr Inflation Breakeven in Japan
UK retail sales in April ex auto fuel rose .8%, 4 tenths more than expected but March was revised down by a like amount so call it a push relative to expectations. We know the UK consumer is facing painful inflation that is still running well above wage growth. Brexit has likely exaggerated their inflationary pressures.
END