U.S. retail sales for last month came in much stronger than expected on Tuesday, signaling shoppers were not deterred by sticky inflation. That’s certainly good news overall for consumer stocks. Before the opening bell, the government reported September retail sales rose 0.7% from the prior month — more than double the estimates. That number, which is not adjusted for inflation, outpaced September’s stronger-than-expected 0.4% rise in the consumer price index. Measuring year over year, the 3.8% increase in retail sales was still slightly higher than the CPI’s advance of 3.7%. The retail sales data pointed to a resilient economy despite inflation still running way above the Federal Reserve’s 2% target. And, that dynamic supports the higher-interest-rates-for-longer scenario that Fed officials laid out at last month’s meeting. Following Tuesday’s sales figures, the Atlanta Fed’s GDPNow estimate of U.S. economic growth in the third quarter rose to 5.4%. The market odds on a rate hike at the Fed’s December meeting jumped to more than 44%, according to the CME FedWatch tool. Central bankers last month signaled one more rate increase before year-end and fewer rate cuts next year. However, the headline retail numbers — and their impact on the economy and Fed policy — do not tell the full story for stock pickers like us, who want more company-specific information. So, we pulled September sales from a few sectors in the government report and looked at what the trends indicated for three of our Club retail names. AMZN YTD mountain Amazon YTD Non-store retail sales, which represent online purchases, increased 1.1% month-over-month and 8.4% from last year, which got us thinking about Amazon (AMZN), the dominant player in e-commerce. Those solid numbers suggest that demand continues to be more resilient than what many fear. And, it’s possible this category could go even higher next month since Amazon just had a strong Prime Big Deal Days event last week. What we’ll be watching when Amazon reports its quarter later this month is improving the profitability of its retail operation and a stabilization in revenue growth at its Amazon Web Services (AWS) cloud division. We think both are possible over the next few quarters as costs are managed through efficiency initiatives and higher-margin revenue streams, like advertising, become a larger piece of the pie. Additionally, artificial intelligence products and an improvement in cloud demand are supportive of an incoming growth inflection at AWS, though the exact timing of reacceleration remains up for debate. SBUX YTD mountain Starbucks YTD Food services and drinking places grew 0.9% month-over-month but soared 9.2% year-over-year, representing the strongest growth on an annual basis of any of the categories. People continued to prioritize spending money on “going out” and experiences instead of goods. We don’t consider Starbucks (SBUX) part of this “short on time, long on money ” trade that Jim Cramer has popularized for more than a year. However, the coffee retailer is known to many as the “third place,” where people spend time when they are not at work or in their homes, which is befitting of a similar theme. We’re encouraged that Starbucks’ reinvention plan is starting to take shape, which should translate to higher revenue growth long term. Starbucks reports earnings next month. TJX YTD mountain TJX Companies YTD Clothing and clothing accessories stores were down 0.8% month-over-month but increased 0.1% year-over-year. Our lateral here is TJX Companies (TJX), home to T.J. Maxx and Marshalls. It’s hard to make a direct comparison from the government report on how the off-price retailer is performing because the company is gaining share left and right while others in retail are closing stores and discounting goods. TJX has been performing better than its peers given the high-quality merchandise it offers at low costs offering a strong value proposition to its customers. For its fiscal 2024 second quarter, TJX delivered a stellar report that not only revealed better-than-expected topline growth but also gross margin expansion, supported by lower freight costs. The company’s operating cash flow more than tripled analysts’ forecasts while same-store sales growth doubled analysts’ predictions. Remember, TJX is not only clothes and accessories. It also owns HomeGoods, whose better-than-expected sales in fiscal Q2 were also higher than a year ago. Bottom line We’re encouraged by the year-over-year strength in online sales and food services and we think TJX can outshine any slowdown in clothing. Looking ahead, the September numbers don’t reflect the restart of student loan payments. We’re going to have to see if that slows consumers down. If student loans were to be a drag on Americans’ spending, then the Fed might be able to overlook the stronger September retail sales and not put the data in the “we need to hike again” category. We’re also optimistic heading into the holiday shopping season. Spending is expected to return to pre-Covid levels for the first time since the pandemic, according to Deloitte’s 2023 Holiday Retail survey , released on Tuesday. This backdrop gives us confidence that consumers facing a variety of external macro factors will be able to anticipate higher prices and find ways to make the most of their budgets. (Jim Cramer’s Charitable Trust is long AMZN, SBUX, TJX. See here for a full list of the stocks.) 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Shoppers along the Magnificent Mile shopping district in Chicago on Aug. 15, 2023.
Jamie Kelter Davis | Bloomberg | Getty Images
U.S. retail sales for last month came in much stronger than expected on Tuesday, signaling shoppers were not deterred by sticky inflation. That’s certainly good news overall for consumer stocks.
