Monthly retail sales reported by the U.S. Census Bureau declined in May but a closer look reveals a more nuanced picture of spending patterns with unexpected resilience in pockets and emerging weakness in others. We believe the uptick in apparel and accessories goes hand-in-hand with higher spending in food and drinking places (see tables 1 and 2). Consumers, buoyed with a sense of optimism about the economic recovery and return to normalcy, continued to update their wardrobe so they can look as good as they feel when dining out. This illustrates that the spending bump in March wasn’t driven by stimulus payments alone but in conjunction with accumulated savings from foregone vacations, loosening social distancing mandates, and growing consumer confidence–all conditions that are still present and likely to provide support throughout the year. Positive demand trends driven by these dynamics underpinned our recent upgrade of off-price apparel retailer Burlington Stores Inc. to ‘BB+’ from ‘BB’, with a stable outlook from and casual diner Brinker International Inc. to ‘BB-‘ from ‘B+’, with a stable outlook.
Other monthly retail sales data confirm the good financial health of consumers.
While spending at restaurants continues to climb, grocery spending hasn’t declined (see table 3). The typical trade-off consumers make between spending on food at home versus food away from home is less evident because consumers have money to spend on dining out while still practicing cooking skills acquired during the pandemic. Similarly, e-commerce is holding steady at very high levels (see table 4). The improving performance of brick-and-mortar stores isn’t coming at the expense of pureplay e-commerce companies. Again, consumers have the cash to spend across all channels. We believe high levels of e-commerce reflect a new normal in the retail landscape and recently upgraded the chief beneficiary of this permanent shift Amazon.com Inc. to ‘AA’ from ‘AA-‘, with a stable outlook, and the short-term rating remaining ‘A-1+’.
On the other hand, spending on home improvement has declined significantly since the March peak (see table 5).
While still well above pre-pandemic levels, when considered with the moderating spending on furniture and décor, this marks the beginning of the end of the nesting dynamic. Add to this the slowdown in the housing market and we’re likely to see challenging comparable sales in the second half of the year for retailers exposed to home improvement, décor, electronics, and furniture. Still, we expect the recent turnover of existing homes and home price appreciation to benefit home improvement retailers in the near-term as Americans spend on repair and remodeling activities. The slowdown should be softened because consumers who are settling into permanent remote-work models are likely to have some lingering household projects and improvements. Issuers that benefitted from the nesting dynamic while maintaining conservative financial policies are well positioned to weather a shift in spending patterns. Lowe’s Cos. Inc.’ (BBB+/Stable/A-2) reported double-digit growth in comparable sales in recent quarters, which resulted in leverage of around 2x compared to its 2.75x target. We believe this gap allows the company to manage its balance sheet in a moderating sales environment while prudently pursuing shareholder returns.
Many retailers are trying to reposition themselves to take advantage of evolving spending patterns.
For example, apparel retailers are expanding into home goods (e.g., Talbots Inc.’s home furnishing brand Haven Well Within); electronics retailers are selling luggage (Best Buy Co. Inc.); and department stores are experimenting with local, small-format stores (Market by Macy’s). Moreover, almost every retailer is investing more in online and omni-channel capabilities such as curbside pickup and buy-online pickup in store (BOPIS). Our view beyond this period of heightened uncertainty is that the future will look a lot like the past: retail will continue to be highly competitive and subject to consumers’ high expectations of convenience and unquenchable thirst for bargains; mall-based retailing will continue its gradual decline while e-commerce will grow; and competition with experiences will pressure the overall spending.
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