A Week Of Retail Therapy For The Markets

With most U.S. economic activity emanating from the consumer, this week’s most crucial economic release is July retail sales on Tuesday. On the surface, it is likely to look weak, with the headline reading expected to decline by 0.2% month-over-month. Like many economic measures, the analysis is complicated by the impacts of Covid and the policy response to the pandemic. March retail sales soared thanks to stimulus checks, so the comparisons are difficult. In addition, continuing supply chain issues impacted the results as vehicle sales slowed in July due to inventory constraints.

While the month-over-month data may look punk, the year-over-year increase in retail sales is likely to top 16%. Retail sales for restaurants and bars, which were harder hit during Covid lockdowns, should grow by over 30% year-over-year. Back-to-school sales should benefit from catch-up purchases due to lost year in 2020 for many locations. Though delayed for some companies, back-to-work clothes shopping should also be brisk, aided by the pandemic weight gains. According to Action Economics, Americans gained an average of 7.5 pounds during the pandemic, and the 42% who gained weight packed on an average of 29 pounds.

Though second-quarter earnings season is winding down, this week has many retailers reporting, including Walmart WMT (WMT), Target TGT (TGT), Home Depot HD (HD), Lowe’s LOW (LOW), Kohl’s KSS (KSS), and Ross Stores ROST (ROST). The macroeconomic backdrop noted previously should provide a significant tailwind for year-over-year sales for the retailers as a whole. Since Walmart and Target remained open during lockdown, they are not expected to see the outsized year-over-year earnings gains of more traditional retailers. Home Depot and Lowe’s benefitted from the stay-at-home environment and housing demand as well. The traditional retailers, like Kohl’s and Ross Stores, are likely to see whopping year-over-year earnings gains, with many of them posting earnings losses in the same quarter last year. Back-to-school and work spending combined with the July Child Tax Credit payments should boost sales at many stores.

As noted previously, the reopening of the economy and a return to more normal pre-pandemic activities negatively affected Amazon.com’s AMZN (AMZN) earnings. Online shopping levels seem to have normalized somewhat, with in-person shopping benefitting. This shift has already shown up in the profits for some primarily offline retailers. Traditional department store, Dillard’s (DDS), posted a massive earnings beat versus consensus and noted “strong consumer demand” but had an additional tailwind from its primary exposure to the more open South Central and Southeastern parts of the country.

While the markets may cheer the earnings rebound for some traditional retailers, it will be essential to distinguish between a temporary boost from reopening and a durable ability to compete with the secular transition to e-commerce likely to continue. Among the items to watch for traditional retailers will be the success of their online efforts. The ability of omnichannel distribution and other actions, like embracing beauty products, to reinforce store traffic will be crucial to the long-term viability of most brick-and-mortar retailers.

Separately, some of the economic impacts of the increase in Delta variant infections are beginning to be felt. China’s zero-Covid policy has shut down parts of its economy, including its third-largest port, while constraining consumer mobility and limiting domestic spending. The U.S. economy is not likely to see a significant impact from the infections or lockdowns, though international headwinds and supply chain disruptions are likely to be felt. There is some evidence of a decline in consumer mobility in the U.S. showing up in public transit and dining demand, so growth seems likely to slow at the margin. Markets will be highly tuned to any changes in the possible impact of infections on economic growth.

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