00:00Joining me to dig into retail earnings is Christine Short, head of research at Wall Street Horizon, a TMX company.
00:07Christine, thanks so much for joining us.
00:10Yeah, thank you for having me.
00:12Christine, let's start with Target because news of this CEO shakeup seems to be really overshadowing the actual numbers.
00:19The stock is sharply lower right now.
00:21Why do you think investors are so disappointed with Brian Cornell stepping down and with the COO replacing him come February?
00:31Yeah, you're right.
00:32It's a little surprising to see investors react this way because they did actually be on the top and the bottom line.
00:38They're still, you know, EPS is still down 20 percent year over year.
00:41That is the fourth consecutive decline.
00:43Revenues were down about 2 percent, the third consecutive decline.
00:47But overall, this story has not been getting much better.
00:51And, you know, perhaps investors will change their mind about a new CEO.
00:54A lot of times they greet that with, you know, positivity because it has not been going so well for Brian Cornell.
01:02Michael Fidelke is an insider.
01:04He's the former COO.
01:05He won't take his new post until February 1st.
01:08So we'll see if sentiment changes over that time.
01:11But I think what you're seeing in the stock today is just an overall reaction to the difficult environment that Target has been dealing with.
01:18We did see a couple of segments pick up versus what they were in the first quarter.
01:23But really, it's just food and beverage, which we know only makes up about 20 percent of their revenues.
01:28But that's the only segment that's consistently been doing well.
01:31We know beauty, which they've tried to uplift a little.
01:35It did perk up a bit this quarter.
01:37It just barely eked out a beat.
01:39But we know that partnership with Ulta to open mini beauty, you know, stations throughout the stores has fallen through.
01:47And then with tariffs, about, you know, 50 percent of their goods are produced in the U.S., but that's, you know, less than you see at a competitor like Walmart, which is about two-thirds.
01:58So they do have more tariff exposure, and it's a bit of a double whammy with the tariffs.
02:03And then the consumer, who is really value-driven right now, and Target, you know, used to once be a beacon of sort of unique items.
02:11They've had an issue with product mix.
02:14They've had issue with customer service and just providing the same cachet that the store once had.
02:19So I think there's a lot going on here.
02:21And investors came into this report, you know, hoping to see more, but not quite getting what they wanted.
02:27It's been a very different story for Walmart this year than it has for Target, and we still like to compare the two.
02:35But what lessons could we learn from Target that could apply to Walmart, which reports tomorrow?
02:43Yeah, you're right.
02:44They are peers, both as discounters, but they have a very different story.
02:47Like I just said, even when it comes to tariffs, they have less exposure.
02:52They have a larger grocery business, and we know consumers are really looking to purchase necessities right now.
02:5760% of Walmart's revenues come from their grocery business.
03:01They're really seen as a one-stop shop.
03:03So you come in for groceries, but you actually might spend some of your discretionary income as well.
03:07They've been negotiating with their vendors.
03:10They've been negotiating with the supply chain.
03:13And so as the world's biggest retailer, it's maybe a little bit easier for them than Target to get some of these deals done.
03:20And they are committed to keeping prices lower.
03:23I know Target's tried to do the same, but I think Walmart's been a little more successful, especially at a time, like I said, when the consumer really is bargain hunting.
03:32Speaking of peers, Home Depot and Lowe's are both out as well.
03:37What's the takeaway when it comes to the home improvement space?
03:41I mean, overall, both did, I think, better than expected.
03:44Okay, so Home Depot did not be on the top and bottom line.
03:49They missed expectations, but they did hold on to full-year guidance.
03:53You saw investors react positively to that.
03:55The stock popped about 4% after that report.
03:58But they did say they're still seeing this deferral of large projects in the home.
04:04So large-ticket items were up about 2.6% year-over-year.
04:08Those are purchases of items over $1,000, so that was a positive.
04:13But overall, like I said, those big home improvement projects, they're still seeing the deferral that they've really been seeing over the last couple of years.
04:20They are trying to get more into the home professional space, which I think Lowe's has been a little more successful with.
04:26When they reported this morning, they beat on the top and bottom line.
04:29They raised full-year revenues.
04:31They kept comp store sales the same and lower range for their EPS for the full year.
04:38So it wasn't a slam dunk on the full-year outlook.
04:40But pretty good to see that revenues were increased based on the recent acquisition of Artisan Design Group.
04:46That is a home professional group.
04:48They also announced an $8.8 billion acquisition of another home professional group.
04:52So they're really leaning into that area of the space because it's more lucrative.
04:56It's a little more steady at a time when they're just not seeing the same home improvement sales and activity because there's not as many new homebuyers in the space.
05:06So you're seeing because of higher mortgages, higher borrowing costs, there's not as many new homebuyers.
05:11And so they're lacking a little there.
05:13But I think on the home professional space, they've been able to offset that a little bit.
05:17And then there's TJX, which has already been a winner this year and is now an earnings winner as well, beat on both the top and bottom line, but also raised its outlook.
05:28What's the biggest takeaway there?
05:32Yeah, the home improved, or sorry, the off-price retailers are really poised to do well in this environment.
05:39The analysts love them because, look, it's on the tariff front, they're not contending with tariffs as much as a traditional retailer or a department store because they're taking excess inventory from other brands.
05:53So things that have already paid tariffs.
05:55So they're not having to deal with that.
05:57And also just as an off-price retailer, I mentioned a bargain hunting customer and consumer, and they're offering discounted prices.
06:04And so, like you said, TJX, the sort of first out of the gate here, we've got Burlington later, we've got Ross Stores as well.
06:12But they've been on the top and the bottom line, earnings per share and revenues grew year over year.
06:17They raised their expectations for earnings per share for the full year to, I think, $4.54.
06:22It was almost a $0.20 increase.
06:25And they expect comp store sales to be at the higher end of their range at 3%.
06:29So a lot of good things working in TJ Maxx's favor.
06:32And we'd expect to see that trickle through to some of the other off-price retailers as well.
06:37Christine, you've mentioned tariffs a few times.
06:40What is kind of the overall consensus about the impact the tariffs are having from retailers?
06:47And are they passing on higher prices onto the consumer yet?
06:52Yeah, I think most of the retailers we've tracked have said they're really trying not to.
06:56But, yes, some of those higher prices have trickled in.
06:59As we know, the tariff and trade policy picture has changed quite a few times this year.
07:04Just last week, there was another pause on Chinese tariffs.
07:07So a bit of a sigh of relief there.
07:09But we're still seeing Chinese tariffs on imports from China 30%, whereas prior to this year that we didn't have tariffs of that size.
07:19So a lot of these retailers are still contending with those, but, again, relieved that they haven't gone up to some of the, you know, percentages that we've heard thrown around 125%, 145%.
07:30So we have a pause until November.
07:32We'll see what happens at that point.
07:34So it's still a bit of an uncertain picture for retailers because they're not sure what happens come November.
07:39But they're trying to prepare as best they can.
07:41Like I said, some of these are negotiating with suppliers.
07:44They're trying to move countries of production.
07:47They're, you know, trying to move away.
07:49Target, for example, just in 2017, 60% of their imports were from China.
07:56And they've gotten that down to 30%.
07:57And they said by the end of next year, expect that to be closer to 25%.
08:01So retailers are trying to, as quickly as they can, move supply chains.
08:04But, as you know, it takes time.
08:06But many of them had said, yes, this will creep into pricing.
08:10And we started to see that.
08:11And we're starting to see consumers a bit fatigued with the increase in prices as well.
08:16How strong is the consumer based on what these retailers have been saying?
08:23You know, like I said, it depends which retailer you look at.
08:25I think the consumer has been surprisingly resilient in the face of a lot of this.
08:30I think the one thing that concerns me the most is the labor market.
08:34We know that the consumer will roll with inflation and higher prices.
08:38We've seen it, you know, really in the wake of COVID.
08:40We've been dealing with higher cost of items, right?
08:44But it's because, for the most part, folks have felt comfortable that they can keep their job.
08:51If they, you know, needed to get a new job, they'd have the ability to find another job.
08:55And that their employment is safe over the next 12 months or so.
08:57Now that we're seeing the labor market, non-farm payrolls a couple weeks ago for July came out, and they were weaker than expected.
09:05We had revisions to the June and May numbers.
09:09Unemployment is still historically very low at 4.2%.
09:12But we're starting to see a few cracks in the jobs picture.
09:16And I think that's where you start to see consumers get a little nervous and hold back a little bit.
09:22We are in the back-to-school shopping season, so we've seen retailers talking about that.
09:27Consumers are still coming out for that, maybe not in the record droves that they did last year or even 2022.
09:35This is the second largest shopping season outside of the winter holiday season.
09:39So they're still here, but I think they are, again, looking for value and looking for a bargain.
09:43Christine Short, head of research, Wall Street Horizon, a TMX company.
09:49Thank you so much for all of your retail insights.
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