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4 Important Investor Takeways From Retailers' Q2 Earnings

Motley Fool - Sun Sep 10, 2023

If you're keeping tabs on retailers' second-quarter numbers, then you've seen a little bit of everything. Some store chains have done well. Others haven't. Several of these names dished out big surprises too, both good and bad. With the dust from Q2's earnings season finally starting to settle, though, retailers' seemingly disparate numbers are collectively making more sense.

Here's a rundown of the four biggest themes investors need to glean from last quarter's results since they're all still in place -- and should remain so, at least through the end of the year.

1. Consumables are a critically important draw now

As is usually the case, grocers (or general merchandise stores that also sell groceries) continued to do well. In fact, the entirety of Walmart's (NYSE: WMT) same-store sales growth of 6.4% within the United States in Q2 was driven by groceries and health products. General merchandise sales were actually down year over year.

In a similar vein, although Target(NYSE: TGT) reported a 5.4% decline in its comparable sales for the three-month stretch ending in July, all of that decline reflected soft demand for its categories like clothing, home decor, toys, and electronics. Company-wide sales of food and beverages grew 2.3% year over year, while equity and household consumables sales grew even more.

Moreover, without offering any addition details, Dollar General(NYSE: DG) CFO Kelly Dilts also commented during the company's Q2 earnings conference call that "we expect continued pressure in the sales line for the duration of this year, particularly in discretionary sales as our customer focuses more on buying for need."

2. Not all discretionary spending is under pressure

And yet, not every consumer is feeling enough of a financial pinch to stop splurging altogether.

To be clear, department store chains Nordstrom(NYSE: JWN) and Macy's(NYSE: M) both reported miserable second-quarter results. Macy's same-store sales slumped 8.2% year over year when not counting its leased and licensed spaces' sales, while Nordstrom's overall sales slipped roughly 4% when factoring in the impact of moving its Anniversary Sale to a different date.

Both retailers touted several of the same strong spots, though. Namely, Macy's and Nordstrom each saw relative strength in beauty/cosmetics, fragrances, and men's dresswear. Macy's also noted strength in women's career-wear and accessories.

This demand may reflect the slow post-pandemic return to offices, but it's strength that's been missing nonetheless.

3. Rural consumers may be feeling the most pain

It's no secret that workers in more urban and metropolitan areas generally earn more than their rural counterparts, mostly reflecting the higher cost of living in these densely populated spaces. Nevertheless, inflation is a problem for everyone. Right now, however, inflation may be more of a problem for rural households with lower absolute incomes.

The clues leading to this conclusion lie in the numbers of the two retailers most focused on rural America. That's the aforementioned Dollar General and -- although it doesn't make the point as often as Dollar General does -- Big Lots(NYSE: BIG). More than two-thirds of Dollar General stores are located in towns with populations of less than 20,000 people.

Big Lots CEO Bruce Thorn didn't mince words when he said late last year, "We will increasingly focus on rural and small town markets where we know we outperform with our strong assortment of furniture and home goods, while taking a prudent near-term approach to opening stores." Right on cue, a spate of large-market store closures began early this year.

In retrospect, Thorn might have wanted to wait just a bit longer to pull that trigger. Last quarter's same-store sales tumbled 14.6%, while Dollar General's were essentially flat.

For perspective, comparable retailer Dollar Tree(NASDAQ: DLTR) didn't run into the same headwind, perhaps because both of its banners aren't quite as heavily exposed to rural America. Dollar Tree's same-store sales were up 7.8% year over year in Q2, while its Family Dollar chain's same-store sales grew 5.8% during the same three-month span.

4. Deep value is still a draw regardless of price point

Last but not least, cash-strapped consumers are -- as always -- still willing to spend almost any amount of money when the deal is good enough. This idea is most evident in the second-quarter numbers posted by discounter Ollie's(NASDAQ: OLLI) although discount apparel retailer The TJX Companies(NYSE: TJX) -- parent to TJMaxx -- underscores the premise as well with its Q2 results.

If you're not familiar, Ollie's is a close-out retailer. That is to say, it buys the goods that other retailers couldn't sell, or buys the goods that suppliers were never able to wholesale to retailers. This is merchandise that vendors and other store chains are often so eager to shed that they'll sell it to Ollie's at a loss. Ollie's then marks it up, but still passes its tremendous savings along to its customers. (Think of what Big Lots used to be in a much bigger way before the company began inching its way toward what Family Dollar and even Walmart aim to be.)

What distinguishes Ollie's from its peers is its price points. It sells a surprising number of items in excess of $20, with a handful of goods priced at or even above $100. Air conditioners, ceiling fans, furniture, flooring, and even mattresses and more are found in its 482 stores.

The curious part? Last quarter's same-store sales were up 7.9%, making it clear that it's still selling goods at a variety of prices, even though -- in Dollar General CEO Jeff Owen's words -- these consumers "feel financially constrained." They're clearly not that constrained.

And TJMaxx, along with its sister storefronts like Marshalls and HomeGoods, did similarly well. Also leveraging closeout merchandise and deals on overstocked goods, TJX Companies reported same-store year-over-year sales growth of 6% last quarter. The company did about as well with its value-priced clothing as it did with its value-priced home goods, which aren't necessarily at rock-bottom price points.

Connecting the dots

It's not too tough of a situation to figure out. Most people who want a job are working, but inflation has outpaced wage growth. Consumers are cash-strapped. With the world transitioning from a lockdown-laden pandemic straight into economic lethargy, however, these same consumers may be a little stir-crazy too.

That's why some people are splurging a little (albeit selectively), feeling confident enough to do so by saving money in other ways. For instance, Walmart reports an uptick in shoppers from households earning $100,000 or more per year. Like most everyone else, these people are just looking to get more bang for their buck.

The thing is, the conditions driving last quarter's well-stratified retail results haven't changed in the meantime. It's unlikely they will anytime soon, either. Don't be surprised to see these four themes remain in place for some time -- at least for the next couple of quarters, and perhaps until the global economy can find a clearly firmer footing.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool recommends Big Lots, Ollie's Bargain Outlet, and Tjx Companies. The Motley Fool has a disclosure policy.

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