Global Courant
Americans are expected to spend less this holiday season and look for discounts, according to a new CNBC survey of retail logistics executives. This desire to save money at a time when most people need to shop would favor discount brands from TJX Companies (TJX) and Costco’s (COST) at bargain prices. According to the latest CNBC Supply Chain Survey, released Friday, 71% of respondents expressed concern that consumers will cut holiday spending in response to inflation. Meanwhile, about two-thirds of those polled by CNBC expect consumers to look for discounts. Along with an already cost-conscious consumer, the value shoppers can get at TJX-owned TJ Maxx, Marshalls, and HomeGoods, as well as Costco, play directly into our investment thesis on both stocks in these times of economic uncertainty due to the Federal Reserve’s insistence that troublesome inflation has not yet been overcome. The Fed interrupted the series of rate hikes on Wednesday, but indicated that two more will likely follow this year. Inflation currently remains high, even if the trend has been smaller increases in recent months. The decline in recent demand for discretionary purchases reflects consumers’ concerns about higher prices as they try to prioritize the essentials. For example, Home Depot (HD) expects total sales and same-store sales to decline 2% to 5% each in fiscal year 2023. It also forecast a full-year decline in diluted earnings per share (EPS). by 7%. and 13% as DIYers retreat to home improvement projects. Home Depot, which last month reported its biggest quarter-over-quarter sales loss in about 20 years, stuck to its earlier full-year expectations at its Investor Day last week. increased inventory levels, leading it to report lower expectations for the remainder of the year. Management has updated its fiscal 2023 sales guidance to a decline of 6.5% to a decline of 8% from its previous expectation of a decline of 3.5% to a decline of 5.5% as “consumers are forced to have more choice in how they spend their money,” said CEO Mary Dillon during the company’s post-earnings call last month. To be sure, consumers spent more than expected in May as government retail sales results from earlier this week rose 0.3% for the month. That is higher than the estimate of 0.1%. Tuesday’s consumer price index showed a 4% year-on-year increase in May, down from April’s 4.9% and a massive drop from the Covid pandemic peak of 9.1% in June 2022. While the cooling inflation seemed to have eased what Americans had last month, retailers are still preparing for a cautious shopper ahead. To meet the pressured consumer, Wall Street believes having the right inventory will set successful retailers apart from the rest of the pack. COST YTD mountain Costco YTD performance Cowen called Costco a best idea for 2023, citing steady traffic trends, record renewal rates and solid revenue from membership fees. Importantly, in a recent research note, analysts also highlight Costco’s prudent inventory management as a “catalyst for solid execution ahead.” The wholesaler, analysts explain, plans to increase its range of food products to balance slower discretionary sales. The company said there are “gross margin tailwinds” ahead for Costco as supply chain costs fall. These “extra gross profit dollars could be invested in stronger price differentials and could drive (higher) mid- to single-digit traffic.” We think the possibility of an increase in the membership fee and a special dividend sometime in the future would be a nice icing on the cake and keep us as a long-term owner of the shares. When CFO Richard Galanti was asked about membership prices during the post-earnings call last month, he again gave no indication that a price hike was imminent, though he acknowledged it would happen “at some point.” TJX YTD Mountain TJX Companies YTD Performance In a separate research note, JPMorgan said TJX is best positioned to respond to consumer demand. The off-price retailer’s 46-year track record of offering value “resonates with consumers in a number of economic environments,” analysts said. They also like TJX’s “consistent execution” in both inflationary and recessionary periods, “given TJX’s 1,200 buyers buying good/better/best merchandise that appeals to a broad income and age group.” For the fiscal year ended February 3, 2024, TJX expects total store comparable sales to grow 2% to 3%. Management said it sees no deterioration in demand as it offers the best value and a treasure hunting experience consumers love. In particular, the company sees a clearer path to improving profitability to pre-pandemic margins. The Bottom Line In a tough shopping environment where consumers are expected to spend less and chase discounts, we stick with retailers that offer quality items at great value prices, and that has always been TJX and Costco. “We currently have the top two retailers,” Jim Cramer said Wednesday at the Investing Club’s monthly meeting in June. “TJX because there’s so much excess inventory in the system and TJX can choose from plethora of department stores and Costco because it offers the cheapest merchandise,” he explained. We are encouraged that TJX has been a value-add for consumers stressed in an inflationary environment and has solid execution in a slower economy. This gives us more confidence that the outlook for the off-price retailer looks positive in the second half of the year and the best way to capitalize on the current retail environment. We continue to view Costco as a best-in-class operator and remain big fans of the club membership model, value proposition and high customer loyalty. During periods of inflation, Costco is able to keep prices low and attract new members. We recently sold COST shares to secure some profit. That sale came Wednesday following Costco shares’ solid 9% run following its latest earnings report in May. (Jim Cramer’s Charitable Trust is long TJX, COST. See here for a full list of the shares.) As a subscriber to the CNBC Investing Club with Jim Cramer, you 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 charity’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO FIDUCIAL OBLIGATION OR DUTY EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Shoppers come and go the TJ Maxx store on the Mall at Prince George’s on August 17, 2022 in Hyattsville, Maryland.
Chip Somodevilla | Getty Images
Americans are expected to spend less this holiday season and look for discounts, according to a new CNBC survey of retail logistics executives. This desire to save money at a time when most people have to shop would be a good thing TJX Companies‘ (TJX) off-price brands and Costco‘s (COST) bargain prices.
