00:00Let's discuss the theme more broadly with city retailing and hard lines analyst Stephen Zaccone. Stephen it's interesting that the
00:07market doesn't seem as concerned about broadly as concerned about inflation as these retailers do.
00:14Obviously the consumers are their bread and butter. How serious is the issue. I mean it's a problem for lower
00:20income consumers. Thanks very much for having me on.
00:22You know we've definitely heard about the K shaped economy for some time and I think that continues to be
00:28the theme. You know we had a plethora of earnings reports this week from big box you know home furnishings
00:34auto parts retail. Right. And I think you're getting a picture of the consumer being resilient. You're getting a picture
00:41of the consumer from the top of the K shaped really outperforming. They're doing the best. Right. And I think
00:46the lower income consumer is where things continue to be choppy.
00:50You know I would say we're focused on gas prices being high but it's you know it's not at a
00:55five dollar nationwide level. Feels like there could be an opportunity for that to come down if we get geopolitical
01:01tension easing. But you know there's a lot there's a lot to monitor at the moment.
01:04Are there. I'm looking through your coverage universe and I see certain companies where I think you know BJ's wholesale
01:13for example. Maybe the higher end consumer steps down and spends more money there than he or she does at
01:21I don't know you know name brand grocery store. We've definitely seen that with Walmart. Right. Are you seeing it
01:27at places like BJ's as well.
01:29Well. Warehouse clubs are a share gaining story overall. Right. You know you've seen more and more traffic go to
01:37that box. BJ's is down today some more of the margin specific details.
01:41But underlying trends in the warehouse club space continue to be very strong. You know we have seen some sort
01:47of trade down from the higher income consumer when you get into more of the grocery purchases.
01:52That's fair. You know I would say more broadly though BJ's a little bit more exposure to lower income too
01:58and that's where things have been a bit choppy and there's a cautious view going forward.
02:02What about the more luxury leaning names or you know something like Williams Sonoma. Only if I were feeling flush
02:10would I go and drop serious coin at that store. Right. I would love it because I enjoy cooking with
02:16the products they sell but they're expensive.
02:18So how are they doing. They're doing really well to be honest. They reported yesterday and you know their comps
02:24were up 4.8 percent right.
02:26The home furnishings industry is down low single digits. So they're really outperforming. It's the strength of their brands.
02:33You know they talked about the K-shaped economy. We're at the upper half of the K-shaped economy and
02:38you know our consumer is not necessarily as impacted by the price of gas.
02:42So we you know they've seen pretty good trends and it's it's really bucking the trend of the housing market
02:47you know being weak from a housing turnover perspective.
02:50So they've been performing very well. They've got that exposure to that upper income consumer and I think there's innovation
02:56in the category. Right.
02:57They've got the good brands to come in and shop. So they're doing a very good job right now in
03:02this environment.
03:03When I'm strapped for cash Stephen I want to keep you know the cars I have running longer rather than
03:09buying new ones.
03:10I'll go to AutoZone and buy new bushings control arms sway bars. Is that happening now.
03:16Yeah. Yeah. I think that that's a that's a good sector to be in you know auto parts retail the
03:21AutoZone's the O'Reilly's of the world.
03:23Those are always good sectors to be in from a consumer perspective. That's continuing.
03:29You know the story there is they've had a lot of inflation from tariffs that's continued to be passed on
03:34to the consumer.
03:35The consumer's actually been you know able to to deal with that because you've probably been prioritizing repairing your existing
03:40vehicle.
03:41So they're continue to be they continue to be good areas of having exposure for consumer spending.
03:46As we look into next week AutoZone reports you know we're thinking same source sales growth continues to be in
03:52the up mid single digit range.
03:54Right. So very impressive performance when you think about consumer spending there.
03:58What about those that are tied to housing. I mean you cover both Lowe's and Home Depot.
04:03So I'd love to hear your take on those two in the competition that they have but also a higher
04:08end play like restoration hardware.
04:11You've got to have serious cash to buy some furniture there.
04:15So I'm guessing that the higher end of the K is is doing well supporting them.
04:21Yeah. Home home improvement is an interesting place. You know we had a recent upgrade of Lowe's to buy.
04:26You know the thesis is basically as you think about higher gas prices hurting some discretionary spending for consumer.
04:33The home improvement space it's been challenged for some time. So there's not as much earnings you know risk when
04:39you look at the home improvement space.
04:42You know Depot versus Lowe's we can kind of debate some of the differences. Home Depot is getting a lot
04:46quicker into the large pro complex pro opportunity with some of the building products acquisitions.
04:51I think Lowe's has done a good job gaining share in the small to medium pro opportunity that continues over
04:57time.
04:58Good margin expansion story there as well once we get back to better same sort of sales growth.
05:03You know RH is an interesting one. We're neutral on it. We've recommended it for a long time. We've been
05:08neutral for quite some time.
05:09It's much more of an idiosyncratic story there where you used to have this attractive opportunity in terms of gaining
05:15share in home furnishings.
05:17And now the story has got much more complicated with international being a lower profitability channel and not needing to
05:23see improvement you know over in the European stores.
05:26They also have some new collections that are launching that it's it's TBD whether they'll be successful.
05:31I think they're optimistic but we'll have to see how that all plays out as we go over the course
05:35of the year.
05:36So it's a much more complicated story. Plus you've got a lot of balance sheet leverage that you didn't always
05:40have in the past.
05:41Sonoma is a much cleaner way to get exposure to home furnishings and they're executing at a much better level.
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