John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friend, Sam Clement. Sam, say hello.
Sam Clement (00:36):
Hello, John. How are you doing?
John Norris (00:37):
I’m doing absolutely fantastically. However, I’m not exactly sure if I could answer your question if you were to ask me: exactly how is the U.S. consumer doing?
Sam Clement (00:47):
You get kind of different answers and you have different companies coming out saying, “oh things are slowing for us” and others saying “this is the strongest it’s been” and shifting consumers and what they’re buying. And so everybody, it’s kind of like a Rorschach test. Everyone can get what they want out of the data that we have.
John Norris (01:07):
And you hit the nail on the head with that because it’s either feast or famine or so it would seem. You go to certain stores and it’s bursting at the seams and other stores are empty. And the reason why I’m bringing this up is because the data does seem a little conflicted. I mean, it really does. What was the most recent advanced retail sales I think was 1%.
Sam Clement (01:26):
1%.
John Norris (01:26):
Which was shockingly high.
Sam Clement (01:29):
It was several sigmas off of what the market…
John Norris (01:32):
I mean, very high. However, then we get news in the local media that Macy’s is closing its store at the Riverchase Galleria and what’s going on if Macy’s is doing that closing its last store in the state of Alabama. But you go to the Target and the Walmart and the Sam’s and the Costco, it’s just jammed with people. The last thing you want to do is actually go to the Costco out there at the Riverchase Galleria anytime on Saturday or even Sunday. You can’t get in.
Sam Clement (02:04):
It’s incredible how…
John Norris (02:04):
The Sam’s Club, which I frequent, they’re groaning with people and yet some of the bigger department stores, maybe not so much.
Sam Clement (02:15):
And even if you read earnings reports and get really into the weeds and hear what these companies are saying, they’re talking about different areas. Walmart’s a great example. They sell everything. And so you’re seeing customers choosing in different areas and less of some areas and more of some areas. And so consumers are just, it seems like everyone’s kind of, I don’t know, figuring things out and figuring out what’s important and what makes sense. Because we’ve talked about it since almost probably two years ago at this point when inflation first became a topic that it’s this snowball that the longer it goes on, the harder it gets. I mean just intuitively, the harder it gets. Prices aren’t coming down. You’re stretching your budget, you’re stretching your budget,
John Norris (03:02):
Stretching your budget,
Sam Clement (03:03):
And your wages may be picking up some, and for some people they may be doing better, but overall you’re kind of holding on and…
John Norris (03:10):
Kind of worked down that little rainy day fund enough where it’s just feeling a little bit too uncomfortable now. And it’s important that you brought up that snowball effect because I’ve already mentioned the Macy’s closing in Birmingham, the Fresh Market had two locations in Birmingham, closed down one out in the Inverness area, leaving it one here in the Birmingham market. Conversely, a couple of weeks ago, I guess it is now, Walmart had its most recent earnings report- was that last week? I forget. And what they said was it was great. They saw nice increase in a year-over-year sales, same-source sales and in the comments section, both the CEO and I think the CFO commented about how what they’re seeing is higher income people coming to the stores and more people getting new Sam’s memberships. I think it was something like a 14.4% increase in the second quarter in terms of Sam’s memberships. And so when I hear that, I’m going, huh. And then Target came out, I think today, or yesterday, they had a great second quarter. I mean same-store comps up 3%, very much in line with what Walmart had said the previous week. Conversely, I’ve already mentioned Macy’s once closing down their store in Birmingham. That’s the third time I’ve mentioned it. But
Sam Clement (04:35):
You’re a big Macy’s guy, huh
John Norris (04:39):
They recently had their quarterly earnings report and it was a disaster. Talk about, I mean, store sales down 3%, people weren’t coming in, units aren’t moving. Also Dillards, which is another major department store chain headquartered in Little Rock, their second quarter reports, I mean the CEO didn’t even try to put lipstick on that pig, just said, we are disappointed in them.
Sam Clement (05:02):
We saw Starbucks, they’re kind of in a little bit of turmoil, but they had back-to-back quarters of kind of pulling back consumers. But then you have the Home Depot guiding a little bit better than expected and Lowe’s guiding worse than expected. And so you really can, I mean Target, I think, whether this is even accurate or not, people think of Walmart as the lower end and Target as the higher end.
John Norris (05:27):
I mean that’s intentional. Target has tried to position itself, yes,
Sam Clement (05:31):
More discretionary than staples.
John Norris (05:35):
And the Target report said that apparel sales were through the roof and all that stuff. Conversely, Walmart sales said groceries and things of that are absolutely just through the roof. So people are still shopping without a doubt, but it does seem as though they’re shopping at the lower-cost provider as opposed to where the discretionary money would have ordinarily, your Macy’s, your Dillards, your other stores of that nature.
Sam Clement (06:06):
There’s several trends. You have inflation, what’s happening there. You have trends with what consumers have done really since Covid. We’ve seen Walmart talk about their Walmart Plus and the growth with online there. And so it’s kind of like the cream of the crop, the cream rises. Companies that have managed these last couple years, I mean Walmart’s been one of the best performing stocks in the market that doesn’t sell semiconductors. And so companies that are managing their balance sheet well, their growth well, they’re being more…
John Norris (06:44):
Staying focused on their business model.
Sam Clement (06:45):
Focused on their business, focused on where consumers are headed. Those companies are kind of doing fine. I mean the Macy’s and the Dillards of the world, I wouldn’t go to one. I mean, there was one right down the street and I never went to it. I went to it once when they were going out of business.
John Norris (07:05):
Alright, now this is the point in the program where I’ve got to mention that we are, Oakworth Capital Bank is, a relatively major owner of Walmart. I mean relatively speaking, not in absolute terms and certainly in relative terms of Walmart. We own that across client accounts and it has a position in all of our strategies. However, conversely, we are not major holders of Macy’s or Dillard’s. I don’t believe we have any of those shares on our system whatsoever and what have you.
Sam Clement (07:37):
Don’t make a market in any of them.
John Norris (07:38):
Yeah, don’t make a market in any of them and no offers to buy or sell securities or anything like that. So, you’re right about that. And Sam, I’ve told you time and time again, and you certainly have learned this in all of your educational upbringing and what have you, you compete on business one of two different ways. You either compete on price or you can compete on product and service. There’s just nothing in between. And so well, if there is something in between, you’re stuck in the middle, you’re not really effectively competing. And I would say those stores which are going to continue to get hammered and not in a good way, by the way, Sam, are those that are kind of stuck in the middle. Walmart, Target. We know how they lead. Primarily on price. Target would like to say, well, we have better products, but they’re price winner. No one goes into Target looking to buy Bulova watches or anything like that. Conversely, on the upper end, I mean probably a lot of non-publicly traded companies, you have people that, hey, this is what we’re going by. Luxury automobile, automotive dealers, those are the ones. But in the middle? Macy’s? Dillards? Kohls? Nordstrom?
Sam Clement (08:51):
That’s what I was talking about. Since COVID, the service model has changed and they were behind the times on them. That is a trend that I’m convinced is never going back outside of maybe very luxury high-end, of you going to stores to purchase the majority of what you buy. That trend is dead to me.
John Norris (09:17):
I would also say that department stores just in general have not done themselves any favors because the fact I can go into a Dillard’s, I can go into a Macy’s, I can go into just any Belk or whatever it is now, I can go into any department store and essentially find the exact same products at the exact same price points. There’s no differentiation between Tommy Hilfiger, Natica, Ralph Lauren, you can get them anywhere. And they have their own stores, too.
Sam Clement (09:50):
The other trend we’ve seen beyond that is the shift of goods versus services. I mean, we’ve talked about that tons of times. I think it was last summer, Delta CEO saying, no one’s coming back to the office because they’re on our planes. But there was some truth to that. And I think that’s probably also an area where, you know, there’s articles about the booming industry of Americans traveling to Europe. And that’s maybe slowing down a little anecdotally. I haven’t seen it slow down.
John Norris (10:28):
I don’t know how often you’re on Instagram, but every time I go on Instagram, it seems like my niece and all of her friends are somewhere in Europe.
Sam Clement (10:35):
I mean, we did it last summer.
John Norris (10:38):
Not we, you.
Sam Clement (10:38):
Yes, me (laughs). So you have this change in consumer priorities. To me, that’s a healthy thing. I’ve always leaned in that camp of experiences are more important.
John Norris (10:54):
Well, I would tell you, I mean just little things that we all know about: the amount of money people are spending to go to concerts, to go to a Taylor Swift show, which, what is this? The world’s longest tour?
Sam Clement (11:08):
Taylor Swift and Beyonce literally stimulated the economy. I mean, it showed up in the data that the Fed had to talk about it.
John Norris (11:18):
But the thing about it is if you’re a sort of, maybe a second quartile income earner, and you’ve got to drop what, a thousand bills to go to see Taylor Swift, guess what?
Sam Clement (11:31):
I think it’s thousands.
John Norris (11:33):
You are probably not going to go to the Fresh Market. You’re probably going to take a look at the Walmart to see what they’re selling over there. And I get it. I certainly get it. So I would say that because the experiences have become so popular, travel’s become so popular, concerts have become so popular. Just events, just, I’m going to go do this. Every time I hear about a younger person and particularly, taking a vacation, it’s always some sort of wow factor to it in my estimation. Money’s got to come from somewhere. You’ve got to save the money from somewhere. And as a result, guess what? People are going to the big box retailers and the like. And I think we’re going to see a lot of sort of those stuck in the middle retailers are going to just have a devil of a time until that trend changes.
Sam Clement (12:26):
And I’m not sure when that trend’s going to change. And then the last trend, I think on top of this, the inflation’s the one that is near everyday impacting consumers. We’ve talked about the change in priorities for spending, how people shop. I think the other big one, and we’ve talked about this a little bit in this inflation conversation, is the haves and the have nots and this wealth transfer that’s going on. That is also boosting spending on the have side of things. So you’re having these people that frankly, inflation has just boosted their balance sheets and these are the boomers, the silent generation, what have you. These people that are now passing assets on to the next generation. They’re the best they’ve ever been. The markets at an all time high.
John Norris (13:15):
You tell me that. I mean, where’s my money? Come on.
Sam Clement (13:19):
The market’s at an all time high, inflation is good for the market.
John Norris (13:24):
Good without a doubt.
Sam Clement (13:25):
So the haves have assets, inflation is good for the haves, the have nots. Inflation is bad for them.
John Norris (13:33):
The data would suggest that clearly the top five, top 10%, if not the top one or top 1/10th of 1% have crushed it over the last several years have absolutely crushed it. I think we’ve probably seen the Gini coefficient get to its highest level of all time.
Sam Clement (13:48):
Probably. Yeah.
John Norris (13:48):
By the time the dust settled and, the smoke clears. However, even with those folks, I think there’s going to be a change in spending pattern. Again, going back to, okay, I want to do this. Last year Beth and I went to go see U2 in Las Vegas. I mean, I wouldn’t have done that three years ago, you kidding me? But in order to pay it, hey, little jam sandwiches, that’s a hyperbole and all that stuff. But you do start thinking about it a little bit. Hey, I’m doing this. I’ve got to cut some money back from someplace else. And really maybe not so long ago, those same people are there are paying thousands to go see Beyonce paying thousands to go see Taylor Swift traveling to Europe to go to the Olympics. They wouldn’t have thought twice about paying two bucks for a box of Kraft macaroni and cheese somewhere when it’s $1.50 at the store next door. Now all of a sudden they’re going to that store next door that’s selling it for a $1.50, if you catch my drift. Because a lot of these stores don’t sell anything any different than anyone else. They’re just selling at different price points.
Sam Clement (14:53):
Yeah, I agree.
John Norris (14:55):
So I think we are seeing a change in consumer patterns as your upper incomes are still spending money on experiences, maybe super high end-type things. And in order to get the money to do that, they’re being a little bit more conscious on those day in and day out products which have been killing the lower income classes. And now all of a sudden upper incomes, in order to do all the stuff they want to do, they’re being a lot more cost-conscious on things like the grocery store, the gas station, and all that unfun stuff that we have to purchase.
Sam Clement (15:31):
A lot of that though, I agree, is kind of what helps bring inflation down though.
(15:39):
Inflation can become a self-fulfilling. I guess prophecy is not the right word because it ruins itself, by the fact that it can do it softly or quickly and one’s okay. And that’s what we’re still kind of talking about, whether we’re in a soft landing or not, whether it impacts consumers enough to where they pull back a little and these staples companies don’t have the pricing power. And I think we are past that point. We’ve seen these staples companies… prices are coming down. We’ve seen fast food companies talking about $5 deals. This is not, that sounds anecdotal, but it’s not. They have, all of them have talked about it.
John Norris (16:19):
It’s not anecdotal when the CEO of McDonald’s a couple of weeks ago says, moving forward, they’re going to be focusing on value.
Sam Clement (16:26):
Yes.
John Norris (16:27):
They flat out said it in the earnings report. They’re going to be focusing on their value menu.
Sam Clement (16:31):
We’ve seen PepsiCo talk about how they don’t have… I mean for quarters they had this top line growth with no sales growth. They were growing purely off of pricing power. And We have reached a point where that is not applicable. Consumers are not allowing companies to raise prices as much as they want.
John Norris (16:53):
All the people would say that inflation is definitely a monetary phenomenon. And it is, let me get to that in a second. You still can’t escape the good old fashioned supply and demand curve. Inflation is monetary phenomenon because people have more money to spend, therefore demand goes up and
Sam Clement (17:11):
It’s another snowball effect.
John Norris (17:13):
It’s another snowball effect. And they want to get rid of their depreciating money as fast as they can. So demand goes up. If supply doesn’t go up as rapidly as demand does then prices increase. Now, what’s happening now is, I would say all that funny-money that Washington threw at us in 2020, and particularly in 2021, we’ve kind of drawn that down a decent amount, at least throughout much of many households. Maybe not the top 5, 10, 15, 20%, but everyone else is kind of drawn down on that. So they’re feeling pinched. But now we’re seeing upper end consumers starting to be a little bit more cost-conscious and as a result, what we’re going to see is demand for these products. You see these upper end products, it’s going to go down. So inflation’s going to start coming down as consumers, upper end consumers shift from the Fresh Market. Not to pick on the Fresh Market, but I am picking on the Fresh Market. As people shift from the Fresh Market to the Walmart to do their grocery shopping. That will have a virtuous effect of bringing down prices across the entire grocery store sector.
Sam Clement (18:26):
And we’ve seen it.
John Norris (18:30):
Yeah, I’m starting to see it. I hate to admit it. No, I like to admit it, but I hate to admit it because you and I have gone on and on about this. I’m starting to see it. Listen, they’re not dropping like a stone, but it’s obvious to me, I can now get a couple of deals at the grocery store, and it’s been within really the last three or four weeks. It’s like I’m starting to see a few deals at the grocery store. Okay, maybe Duke’s mayonnaise is still priced a little bit higher than I would like, but it’s not going up anymore. And the BOGOs, who doesn’t love a good BOGO, the BOGOs are far more frequent than they used to be.
Sam Clement (19:06):
But even in the broader data that we get, I mean you take housing out of it, inflation is back to the target
John Norris (19:15):
Except for that homeowners insurance and car insurance. My
Sam Clement (19:18):
Goodness, that’s a one time that’s killing one time late cycle thing come
John Norris (19:23):
On. That one time just keeps on giving together just absolutely horrible.
Sam Clement (19:30):
Fair enough. You know how I feel about that. But the cycle of inflation, we’ve seen it take place. I mean we talked about when inflation was at eight 9%, we were talking about probably actually being higher than that for the same reason that now I’m arguing that it is lower than the headline data suggests.
John Norris (19:51):
Well, I am not sure just how well the BLS does in terms of calculating in the BOGOs and the 50% off and all that type of stuff. I don’t know how good a job they do with that. I really don’t. Or what they do with the substitution baskets. You just have to take their word for it and the waitings and what have you. I will tell you, grocery store prices are still too high for the average American, but they’re not the problem. At least the growth in prices is not going to be the problem that it has been moving forward. And whoever wins the election in November is going to be able to crew to claim a massive victory over food inflation next year. Although they did absolutely nothing about it because it was coming down on their own. I
Sam Clement (20:33):
Agree. What do you think about that? I think that’s spot on.
John Norris (20:36):
Oh man. I tell you. Alright, well guys, we’d love to hear from you all. So if you have any comments or questions, please by all means, let us know. You can always drop us a line at Trading where you can leave us a review on the podcast outlet of your choice. If you’re interested in reading more or hearing more of what we have to say or how we think, you can always go to o court.com, O-A-K-W-O-R-T H.com. Take a look underneath the thought leadership tab and find links to all kinds of exciting information, including links to previous Trading Perspectives episodes, links to our newsletter /blog Common Cents comes out every Friday, and then links to quarterly analysis, which we internally call Macro and Market, as well as all kinds of exciting information about personal financial planning and a number of different topics. Please by all means, go take a look underneath our thought leadership tab and find all that exciting information. Alright, Sam, last chance to say something. It’s super meaty on this exciting topic. That’s all I’ve got. That’s all I’ve got today too. Y’all take care.