Show Transcript
While the consumer has been feeling the pinch of higher costs, John Kernan, Managing Director at TD Cowen tells MoneyTalk’s Greg Bonnell there are still signs of strength in retail.
Print Transcript
[AUDIO LOGO]
* With markets anticipating a rate cut from the US Federal Reserve, one area of focus has been the health of the consumer. Of course, we are seeing signs that households are feeling a bit strained. So what does it all mean for the retail sector? Joining us now to discuss is John Kernan, managing director for retail and consumer brands at TD Cowen. And for full disclosure on the companies covered by TD Cowen, please see the link to the website at the end of this program. John, welcome to the show.
* It's great to be here. Thanks for having me.
* First time having you on the show. Let's talk a little bit to begin with-- before we get to the retail stuff-- about the parts of the market you cover, your day-to-day working universe.
* Sure. I cover retail and consumer brands here at TD Cowen. I've been here for 14 years, and I've covered the consumer and retail space throughout that entire time period. So we live and breathe the consumer trends, the health of the consumer.
* The big market-cap companies that I cover include Nike, Adidas, Lululemon, the big off-price retailers-- TJX, Ross Stores, Burlington-- most of the sporting good retail complex, and all the brands that sell into those stores. So it's a big coverage list that keeps us busy, and it keeps our finger on the pulse of the consumer and trends that are resonating with the consumers.
* All right. So you've seen a few cycles. Obviously, this is a very interesting time-- as I was saying at the top, anticipation that the Fed can start delivering rate cuts. We look at all the data points. Big one, obviously, for the US economy is that consumer. What's the general environment right now? How are they feeling?
* Consumer is stronger than the headlines give the broader consumer credit for. There's been a lot of negativity about the consumer. There's been some headlines. Some high-profile consumer companies across a variety of sectors have pointed to tougher trends into the summer.
* But I think a lot of that has to do with competition, inflation that shifted spending around. But if you look at the broader consumer-- the levels of spending that we track-- it's still very healthy. We're at a 4% unemployment rate. So the economy is strong. The financial markets are at all-time highs. Housing prices are at all-time highs. So it's not all doom and gloom.
* You have to also remember that much of the bulk of consumer spending is done by the high-income consumer. They account for a tremendous portion of overall spending levels and account for a much higher portion of lower-income consumers, which have been more stretched because of inflation.
* All right. So perhaps, as you said, consumer a little stronger than the headlines will lead us to believe as we check in on the financial news from day to day. How did that play out for the most recent earnings season? What were your big takeaways?
* Yeah, sure. There's been some companies that reacted very favorably and showed tremendous strength on a relative basis across consumer. In my coverage list, we just heard from the off-price retail complex TJX, Ross Stores last week. Both reported 4% same-store sales growth, tremendous margin performance, gross margin performance, inventory management.
* Outside of my sector, Walmart and Costco-- which my colleague, Oliver Chen, here covers-- those stocks are at all-time highs. In terms of valuation metrics, they've been reporting a lot of upside to consensus expectations. So there's been certainly pockets of strength. And within that is mixed in pockets of weakness, which I think largely are companies catering to lower-income and more middle-income consumers that are stretched by inflation.
* Is it key for these companies now-- I had a sense when I was reading through these reports as well-- and you said there was pockets of strength-- that companies simply cannot use the blanket idea that high-interest rates-- meaning a high cost of borrowing-- consumer is tapped. That's why we didn't do well this quarter. Like, a company really has to show what is going on in the underlying business?
* Yeah, I think there's certainly competitive dynamics with a lot of these companies, competition across a lot of these consumer sectors-- and particularly mine. And softlines retail has really ramped up. Barriers to entry have come down. There's competition across e-commerce, brick-and-mortar retail. It's as intense as ever.
* So it's not just, oh, the consumer's not spending, the consumer's weak. It has to deal with-- there's a lot of competition for the dollars being spent. Spending has been reallocated among categories. There's been some categories that have seen tremendous levels of inflation. And you're seeing pressure in those areas. So the companies that are delivering the best value, best experience, and best innovation to consumers are still reporting very healthy results.
* Within your coverage universe, if you start to break it down along some of the silos you've been talking about, are there areas that are proving their way-- and maybe even more alluring to customers? I think of sports maybe versus discount versus the more affluent buyer, as you said.
* Yes, health and wellness, athletic spending is still very strong. You can see that Dick's Sporting Goods, which has been a great performer, really, since the pandemic-- that stock is at all-time highs. They report earnings the week after Labor Day. We expect them to be quite strong versus consensus expectations.
* You have some upstart peers now in the space, like On Running and Deckers, which owns HOKA and UGG. Those companies have been putting tremendous innovation in the marketplace. Their gross margins continue to expand above consensus expectations. Skechers is another one we've liked for a long time, delivering great value, price-value equation. That stock is near all-time highs.
* So there's been some really good performance across consumer, but it's been very bifurcated. On top of that, you've had some real weakness in some of the other maybe notable large-cap companies, like, say, a Nike.
* Rate cuts-- the market seems to be counting on these to a certain degree, pricing them in to a certain degree. When it comes to the consumer, when it comes to retail stocks, what could the effect be if the Fed does start delivering those cuts?
* Yeah. Certainly, it looks like we're going to get a cut in September. Whether it's 25 or 50 basis points, I guess, remains debatable. We can clearly see that the Fed wants to take interest rates significantly lower through 2025. And that's going to be good for the consumer. It's going to be good for animal spirits and competence, which really, at times, drive consumer spending.
* It's going to lower borrowing costs. There's been a lot of inflation in borrowing costs the last several years. And I think the consumer will respond favorably to this. There'll be some uncertainty removed about the election outcome in November. And I think, generally, the consumer will be in good shape as we go into 2025. Certainly, there'll be pockets of strength and weakness. But we're certainly in a-- I think I'm more bullish on the consumer camp than I am maybe many of our peers.
* All right, so we've got some nice, positive catalysts there for the retail space. What's the biggest risk as you take a look at your universe, the thing that could go wrong?
* The thing that could go wrong are largely unknowns. That's been the most disruptive piece of macro, so to speak, for the US and global consumer. Obviously, the pandemic came and went. The supply-chain disruptions came and went. Nobody could have ever predicted that.
* I think with the consumer, it's generally-- a lot of it is driven by animal spirits and confidence. And if the unemployment is still where it is today and the stock market continues to make new all-time highs and housing prices are supported, and on top of that, you're getting lower mortgage costs and lower borrowing costs and inflation's coming down in conjunction with that, I would think it's a pretty good environment for the consumer going into 2025-- certainly not the recessionary environment here a lot of folks seem to talk to.
[AUDIO LOGO]
[RELAXING MUSIC]
* With markets anticipating a rate cut from the US Federal Reserve, one area of focus has been the health of the consumer. Of course, we are seeing signs that households are feeling a bit strained. So what does it all mean for the retail sector? Joining us now to discuss is John Kernan, managing director for retail and consumer brands at TD Cowen. And for full disclosure on the companies covered by TD Cowen, please see the link to the website at the end of this program. John, welcome to the show.
* It's great to be here. Thanks for having me.
* First time having you on the show. Let's talk a little bit to begin with-- before we get to the retail stuff-- about the parts of the market you cover, your day-to-day working universe.
* Sure. I cover retail and consumer brands here at TD Cowen. I've been here for 14 years, and I've covered the consumer and retail space throughout that entire time period. So we live and breathe the consumer trends, the health of the consumer.
* The big market-cap companies that I cover include Nike, Adidas, Lululemon, the big off-price retailers-- TJX, Ross Stores, Burlington-- most of the sporting good retail complex, and all the brands that sell into those stores. So it's a big coverage list that keeps us busy, and it keeps our finger on the pulse of the consumer and trends that are resonating with the consumers.
* All right. So you've seen a few cycles. Obviously, this is a very interesting time-- as I was saying at the top, anticipation that the Fed can start delivering rate cuts. We look at all the data points. Big one, obviously, for the US economy is that consumer. What's the general environment right now? How are they feeling?
* Consumer is stronger than the headlines give the broader consumer credit for. There's been a lot of negativity about the consumer. There's been some headlines. Some high-profile consumer companies across a variety of sectors have pointed to tougher trends into the summer.
* But I think a lot of that has to do with competition, inflation that shifted spending around. But if you look at the broader consumer-- the levels of spending that we track-- it's still very healthy. We're at a 4% unemployment rate. So the economy is strong. The financial markets are at all-time highs. Housing prices are at all-time highs. So it's not all doom and gloom.
* You have to also remember that much of the bulk of consumer spending is done by the high-income consumer. They account for a tremendous portion of overall spending levels and account for a much higher portion of lower-income consumers, which have been more stretched because of inflation.
* All right. So perhaps, as you said, consumer a little stronger than the headlines will lead us to believe as we check in on the financial news from day to day. How did that play out for the most recent earnings season? What were your big takeaways?
* Yeah, sure. There's been some companies that reacted very favorably and showed tremendous strength on a relative basis across consumer. In my coverage list, we just heard from the off-price retail complex TJX, Ross Stores last week. Both reported 4% same-store sales growth, tremendous margin performance, gross margin performance, inventory management.
* Outside of my sector, Walmart and Costco-- which my colleague, Oliver Chen, here covers-- those stocks are at all-time highs. In terms of valuation metrics, they've been reporting a lot of upside to consensus expectations. So there's been certainly pockets of strength. And within that is mixed in pockets of weakness, which I think largely are companies catering to lower-income and more middle-income consumers that are stretched by inflation.
* Is it key for these companies now-- I had a sense when I was reading through these reports as well-- and you said there was pockets of strength-- that companies simply cannot use the blanket idea that high-interest rates-- meaning a high cost of borrowing-- consumer is tapped. That's why we didn't do well this quarter. Like, a company really has to show what is going on in the underlying business?
* Yeah, I think there's certainly competitive dynamics with a lot of these companies, competition across a lot of these consumer sectors-- and particularly mine. And softlines retail has really ramped up. Barriers to entry have come down. There's competition across e-commerce, brick-and-mortar retail. It's as intense as ever.
* So it's not just, oh, the consumer's not spending, the consumer's weak. It has to deal with-- there's a lot of competition for the dollars being spent. Spending has been reallocated among categories. There's been some categories that have seen tremendous levels of inflation. And you're seeing pressure in those areas. So the companies that are delivering the best value, best experience, and best innovation to consumers are still reporting very healthy results.
* Within your coverage universe, if you start to break it down along some of the silos you've been talking about, are there areas that are proving their way-- and maybe even more alluring to customers? I think of sports maybe versus discount versus the more affluent buyer, as you said.
* Yes, health and wellness, athletic spending is still very strong. You can see that Dick's Sporting Goods, which has been a great performer, really, since the pandemic-- that stock is at all-time highs. They report earnings the week after Labor Day. We expect them to be quite strong versus consensus expectations.
* You have some upstart peers now in the space, like On Running and Deckers, which owns HOKA and UGG. Those companies have been putting tremendous innovation in the marketplace. Their gross margins continue to expand above consensus expectations. Skechers is another one we've liked for a long time, delivering great value, price-value equation. That stock is near all-time highs.
* So there's been some really good performance across consumer, but it's been very bifurcated. On top of that, you've had some real weakness in some of the other maybe notable large-cap companies, like, say, a Nike.
* Rate cuts-- the market seems to be counting on these to a certain degree, pricing them in to a certain degree. When it comes to the consumer, when it comes to retail stocks, what could the effect be if the Fed does start delivering those cuts?
* Yeah. Certainly, it looks like we're going to get a cut in September. Whether it's 25 or 50 basis points, I guess, remains debatable. We can clearly see that the Fed wants to take interest rates significantly lower through 2025. And that's going to be good for the consumer. It's going to be good for animal spirits and competence, which really, at times, drive consumer spending.
* It's going to lower borrowing costs. There's been a lot of inflation in borrowing costs the last several years. And I think the consumer will respond favorably to this. There'll be some uncertainty removed about the election outcome in November. And I think, generally, the consumer will be in good shape as we go into 2025. Certainly, there'll be pockets of strength and weakness. But we're certainly in a-- I think I'm more bullish on the consumer camp than I am maybe many of our peers.
* All right, so we've got some nice, positive catalysts there for the retail space. What's the biggest risk as you take a look at your universe, the thing that could go wrong?
* The thing that could go wrong are largely unknowns. That's been the most disruptive piece of macro, so to speak, for the US and global consumer. Obviously, the pandemic came and went. The supply-chain disruptions came and went. Nobody could have ever predicted that.
* I think with the consumer, it's generally-- a lot of it is driven by animal spirits and confidence. And if the unemployment is still where it is today and the stock market continues to make new all-time highs and housing prices are supported, and on top of that, you're getting lower mortgage costs and lower borrowing costs and inflation's coming down in conjunction with that, I would think it's a pretty good environment for the consumer going into 2025-- certainly not the recessionary environment here a lot of folks seem to talk to.
[AUDIO LOGO]
[RELAXING MUSIC]
