Inflation doesn’t make a difference, but its impact does

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Rates rise, expenses fall

We’ve all heard the headlines of inflation hitting four-decade highs and its negative effect on operating margins and consumer spending. Inflationary pressures have sent commodity prices skyrocketing, compounding rising logistics costs and supply chain disruptions. Soaring grocery and gasoline prices have eroded consumer confidence and spending habits. To fight inflation, the Federal Reserve made a hawkish 180-degree turn a year ago, when it overused the term “transitional” (temporary) in reference to inflation. They accelerated rate hikes to 75 basis points to slow the rapid pace of inflation, which hit a 40-year high of 9.1% in June 2022. Inflation hits everyone, but everyone world is not affected in the same way. This has caused a negative correlation within consumer spending, which also leads to divergence within industries and between peers.

Rates rise, expenses fall

Wages are not rising at the rate of inflation, causing consumers to adjust their spending habits. As they shift their spending more towards necessities, they are also hurting their disposable income due to higher interest rates for credit card, loan and mortgage payments. Fed rate hikes sent US equity markets down (-14%) over the year, fueling a significant change in consumer confidence. Consumer discretionary items like clothing are being skipped in favor of consumer staples like eggs and vegetables. People look for necessities when the weather gets tough. However, the impacts affect low-income households more than high-income households. Even high-income households are looking for bargains. This differentiation is also found in the stock market.

The haves

High-income and wealthier consumers are less affected by the effects of inflation. This is illustrated by the fact that premium brand companies feel less pain since their customers can better withstand inflation. High-end sportswear maker Lululemon (NASDAQ: LULU) smoked its second-quarter 2022 earnings with same-store sales growth of 25% and direct-to-consumer (DTC) growth of 42%. Revenue rose 28.8% year-on-year, beating analyst estimates of $0.34 per share. They raised their full-year EPS forecast to between $9.75 and $9.90 from $9.44 according to analysts’ estimates on an increase in revenue between $7.865 billion and $7.94 billion. versus $7.69 billion according to consensus analyst estimates. Luxury retailer Capri Holdings (NASDAQ: CPRI) owns high-end brands Versace, Michael Kors and Jimmy Choo. They saw revenue climb 8.5% year-on-year and raised their FY2023 EPS to $6.85 from consensus estimates of $6.74. They expect revenue to hit $5.85 billion to $5.95 billion versus consensus estimates of $5.84 billion.

Retailers of large and small boxes

In a recession, it would make sense for discount retailers to take advantage as consumers flock to cheaper prices. Warehouse club giant Costco (NASDAQ:COST) is in for some gangbuster business as it saw July 2022 same-store same-store sales climb 10% with net sales up 10.8% to 16.85 billion of dollars. Costco sells both consumer staples (groceries) and consumer discretionary items, but its scale allows it to pass on volume discounts to its members. Groceries are the epitome of consumer staples and they profit from inflation. For example, Kroger’s (NYSE: KR) scores high on food inflation and robust home consumption trends, as its profits rose 12.5% ​​and revenue 9.3% to 34 .64 billion in the second quarter of 2022. It should be noted that its private label (the generic and less expensive but higher margin brands) saw an accelerated growth of 10.2% in their same-store sales.

The poors

Inflation is hitting low-income households the hardest, as even retailers of discount consumer discretionary goods cannot avoid its impact. Kohl’s (NASDAQ: KSS) felt the pain as its low-income demographic customers cut discretionary spending. This was demonstrated by its missed results in the second quarter of 2022, as revenue fell (-8.1%) year-on-year. The company cut its full-year EPS estimate to $2.80 to $3.20 from analyst consensus estimates of $4.19. They guided the revenue forecast for the full year from (-5%) to (-6%). The department store primarily sells consumer discretionary items like clothing, toys, and home products, but not essentials like groceries like Target (NYSE:TGT) and Walmart (NYSE:WMT) . Discount retailer Five Below (NASDAQ: FIVE) sells items priced between $1 and $5 for most teens. They primarily sell candy, toys, novelties, games and cosmetics, which is why their same-store sales fell (-5.8%) in their Q2 2022 results. They had to lower their annual remuneration from (-5%) to (-2%). They hope their store prototype at a Five Beyond store (above $5) will help drive growth. Video games are a discretionary expense and gamers are becoming increasingly frugal. Witness Roblox (NASDAQ: RBLX), which saw increased engagement as the average number of daily users grew 21% year-over-year to 52.2 million, spending 11.3 billion hours on its platform. fitness, up 16.6% year-on-year. However, this did not lead to more spending, as its bookings actually fell (-3.8%) year-over-year in the second quarter of 2022.

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