Here’s what Target said of note in their earnings release and there is some similar language to what they said in the prior quarter:
“Strength in frequency businesses (Beauty, Food & Beverage and Household Essentials) offset continued softness in discretionary categories.”
“Traffic grew .9%, on top of 3.9% in Q1 2022.”
“we now expect shrink will reduce this year’s profitability by more than $500 million compared with last year. While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue.”
“Inventory at the end of Q1 was 16% lower than last year, reflecting more than a 25% reduction in discretionary categories.”
“Based on softening sales trends in the first quarter, the Company is planning for a wide range of sales outcomes in the second quarter.”
It wasn’t just Home Depot who yesterday told us about their business related to the home. The Container Store did too and they said this: “As we look to fiscal 2023, we expect it to be a tough year, considering the intensified macroeconomic headwinds which are driving reduced traffic and lower average ticket prices.”
With regards to Home Depot, here are some nuggets from their conference call:
“As we looked beyond weather and lumber deflation, our underlying performance in the quarter was mixed. We saw more pressure across the business compared to what we observed when we reported fourth quarter results a few months ago. While there was relative strength in project related categories like building materials, plumbing, and hardware, we had many departments with negative comps in the quarter and continued to see pressure in a number of big ticket discretionary categories.”
“DIY customers outperformed the Pro in the quarter, but both were negative…Additionally, recent external data points suggest that the types of projects in these backlogs are changing from large scale remodels to smaller projects.”
“Though we are only one quarter into the year, we believe the underperformance this quarter relative to our expectations, lumber deflation, and continued uncertainty around underlying demand warrant some more cautious sales outlook for the remainder of the year.”
With regards to that consumer, I forget to mention this from the Monday NY Fed’s household debt report: “The share of current debt becoming delinquent increased for most debt types. The delinquency transition for credit cards and auto loans increased by .6 and .2 percentage points, respectively approaching or surpassing their pre-pandemic levels.”
Shifting overseas to Japan. Even though the TOPIX index closed overnight at a 33 yr high we remain bullish and long, as we’ve been over the last few years, as it still remains 26% below the 1989 bubble peak. Attractive valuations, rising ROE’s, better corporate governance, more efficient uses of capital whether in returning it to shareholders or reinvesting, and a beneficiary of the China reopening and expected quicker growth in the Asian region in the decade to come are my bullish factors.
The LEX column yesterday in the FT said it well on Japanese stocks, “In the US, the average bear market historically lasts about 14 months. Stocks return to previous highs three to five years later. In contrast, Japan has waited three decades for its key stock index to revisit its record high of December 1989.” We know with US stocks that it sometimes takes longer to recapture what’s been lost but you get the point.
It’s old news but also out of Japan, their economy grew by 1.6% q/o/q annualized which was twice the estimate of up .8%. Business investment led the way and personal consumption also slightly exceeded expectations.
TOPIX
Singapore, another Asian market we’re long and bullish on, saw its April non-oil exports rise 2.7% m/o/m instead of falling by 3.1% as forecasted. They are still down though almost 10% and little economic growth is expected this year. The Singapore Straits was down 1.2% overnight and lower by 2.4% ytd.
Ahead of the housing starts data at 8:30am est, mortgage apps fell 5.7% w/o/w as the average 30 yr mortgage rate jumped back above 6.5% to 6.57%. Purchase apps fell 4.8% w/o/w after rising by a like amount last week. They are lower by 26% y/o/y. Refi’s declined by 7.7% w/o/w after jumping by 10% last week. They are down 43% y/o/y as the comps get more easy.
The bottom line remains the same with housing. It’s been this bizarre situation that the lack of existing homes for sale are keeping prices inflated and highlighting again that not only did Fed monetary policy create a boom and bust in the mid 2000’s, they’ve again turned the housing market upside down with laying the foundation for a 40% rise in home prices in two years with zero rates and MBS buying, followed by rate shock therapy that left most people that hold a mortgage with a rate well below the current level, thus locking them into staying where they are.
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