Retail Headwinds Rising? Victoria’s Secret, GameStop Earnings Suggest So
2024.06.05 12:01
- April U.S. Retail Sales were below estimates, but other macro data show decent spending trends
- After issuing preliminary earnings reports in May, Victoria’s Secret and GameStop hint at differing consumer vibes
- The two firms also host shareholder meetings next week, potentially drawing further volatility
It’s hard to paint the American consumer using one broad brush. Upper-end households seem to be doing fine, helped by strong stock prices and rising real estate values. And while low-end workers benefit from robust real wage gains at the moment, along with a low unemployment rate, inflation continues to bite, new $5 value meals notwithstanding. Overall, The Conference Board reported last week that 69% of U.S. consumers believe it’s likely that a recession will hit over the next 12 months.
April Retail Sales Soft, Johnson Redbook Index Not Bad
Even if we try to open the aperture to view the whole landscape, we see mixed indicators. The April Retail Sales report, put out by the U.S. Census Bureau, in mid-May revealed tepid consumer spending to the tune of 0.0% compared to March. Look in another direction, and we find healthy retail sales numbers from the Johnson Redbook Index – up 6.3% on a year-over-year basis.
The Sector Snapshot
Consumer stocks, meanwhile, are not having a banner year. Through last month, the Consumer Discretionary ETF (NYSE:) was negative year to date. Consumer Staples (now smaller in total market cap than NVIDIA (NASDAQ:), by the way) has underperformed the , sporting a 6% return in 2024, dividends included. The SPDR® S&P Retail ETF (NYSE:) trails the Consumer Staples ETF (NYSE:) by about two percentage points.
Source:Stockcharts.com
Clothing Sales Up, Hobby Spending Weak
Where are folks clicking and tapping to pay? Groceries was a relatively strong category in the April Retail Sales report along with clothing (athleisure, maybe not so much), but general merchandise and online retail struggled. Electronics & appliances jumped 1.5% in April compared to March while sporting goods & hobbies spending dipped 0.9% sequentially.
Ross Stores (NASDAQ:) posted strong quarterly profit figures, but LVMH Moët Hennessy – Louis Vuitton (LVMUY (OTC:)) was cautious.5 The bag, be it from the discount rack or of the luxurious variety, is mixed.
Victoria’s Secret & GameStop Issue Preliminary Earnings Updates
Wall Street Horizon data show a similar theme. With most of the Q1 reporting season behind us, there will still be the potential for fireworks from a pair of household brand names. Both GameStop (NYSE:) and Victoria’s Secret (NYSE:) report Q1 2024 results in the coming days and host shareholder meetings on Thursday, June 13.
Victoria’s Secret: Positive Trends
First, Victoria’s Secret (VSCO) issued a preliminary earnings announcement back on Thursday, May 9. The report caught the bulls’ eyes. Shares jumped 8% following news that its management team expected first-quarter sales to verify $1.6 billion market cap Apparel Retail industry firm’s adjusted operating income is now seen between $35-$40 million. Though the risqué retailer still expects slower revenue versus a year ago, the new -3 to -4% range is better than the previous guidance which showed a decline of 4-6%. Adjusted diluted earnings per share is expected to be in the -$0.15 to +$0.10 range.6
Is it just a small company in a niche consumer space? Sure. But CEO Martin Waters noted, “The retail environment in North America remains challenging and the promotional environment was very competitive; however, we experienced improving trends throughout the quarter in both our stores and in our digital business for both the Victoria’s Secret and PINK brands.” So, there was a sales incline as the quarter progressed. That’s a hopeful sign heading into the summer.
Will more investors jump into bed with VSCO? We’ll find out after the full Q1 report this week. OK, no more puns about Victoria’s Secret – we might get in trouble. Let’s move on.
GameStop: Bears Roaring After the Meme Spike
How about something lighter? If we were perusing the mall, the video game store would be our next visit. GameStop (GME) was put back in the spotlight in May after @TheRoaringKitty tweeted a picture of an individual leaning forward in a chair.7 That’s all it took for another round of meme stock mania to take flight.
Shares of the Texas-based Computer and Electronics Retail company soared from $17 to an intraday peak of $65 on May 14. The stock had already been in rally mode going back to mid-April. Alas, it was quickly game over for the GME bulls. By the close of the month, GME faded back down to near $20.
Before the big drop, GameStop retreated when it released a preliminary earnings report on May 9. Net sales are now expected to be in the range of $872 million to $892 million.8 The consensus top-line number had been around $1 billion, according to Factset. GME’s executives sought to take advantage of the meme-stock runup by announcing that it planned to sell up to 45 million class A common shares.9
As for the upcoming Q1 report, the options market has priced in a very high 22% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the June 11 release – the latest the company has reported first-quarter results since at least 2016. Implied volatility is over 200%, according to Option Research & Technology Services (ORATS). So, while it’s anyone’s guess where the stock may go next week, the holders may be on edge given the earnings warning and huge expected share-price move.
The Bottom Line
The consumer remains a wildcard as we venture closer to the summer and second half of 2024. It appears that lower-end households are increasingly struggling while the upper tier is faring better. We have already heard that discounters are seeing solid sales results just as luxury brands face headwinds. We’ll know more after two consumer companies issue Q1 earnings this week and next.
