"We've said for quite some time now, it has been a resilient consumer."
That was the comment to me this week from Target (TGT) CEO Brian Cornell on his earnings day. Well, that along with his shout-out to $500 million in cost cuts last year ($1.5 billion is the longer-term goal). I happened to mention I bought Beyond Meat (BYND) meatballs the day before our interview from my local Target.
We laughed, kept it moving, and then I went home for the day to monitor overseas markets.
But Cornell's observation on shoppers left an impression. First, he is right, and second, it's something that goes a long way to understanding why the Federal Reserve has pushed back on a market narrative of more than five interest rate cuts for 2024.
The economy just doesn't need these aggressive cuts, judging by the health of its biggest driver — the US consumer.
February's employment report on Friday was another strong one, posting a gain of 275,000. Wages are up, prices have cooled. The stock market is doing great, making households with stock portfolios feel wealthier (aka wealth effect). Consumer confidence dipped a little last month but hasn't fallen off a cliff for some unexplained reason.
"Consumers are shopping," Cornell added, noting that Target's store traffic improved in the fourth quarter from its run rate seen throughout most of 2023.
EY economist Greg Daco tells me there are several reasons for an upbeat consumer, among them labor market resilience and healthy household balance sheets.
"The increased value of talent post-pandemic has meant that business managers are more reluctant to let go of their prized talent pool despite cost pressures and expectations of slower final demand growth," Daco explained.
"Solid employment growth combined with robust wage growth has translated into strong real disposable income growth, which in turn has allowed consumers to continue paying high prices for goods and services."
Unsurprisingly, Mr. Market has sniffed all of this out.
The VanEck Retail ETF (RTH) — which counts Amazon (AMZN), Home Depot (HD), Costco (COST), Walmart (WMT), and Lowe's (LOW) as its top five holdings — is up 9.2% year to date, compared to the 6.5% gain for the S&P 500 (^GSPC). Shares of Home Depot and Lowe's hit 52-week highs this week, per one of my nifty Yahoo Finance screeners.
And in this resilient (though not gangbusters) backdrop, the winners and losers in retail are becoming very clear. Consumers don't have endless money, but those who have discretionary dollars are spending them at places they value.
Abercrombie & Fitch (ANF) had a mind-boggling 21% sales gain in the fourth quarter. CEO Fran Horowitz (video above) told me the chain continues to gobble up market share among 20- to late-30-year-olds. Rival American Eagle Outfitters (AEO) showed a 12% year-over-year sales increase in the holiday quarter.
Beleaguered mall staple Gap is starting to turn things around, with its Old Navy and Gap brands both clocking year-over-year growth in Q4. Its CEO Richard Dickson told Yahoo Finance that the retailer has gained market share during the quarter.
Discretionary departments, such as home goods and apparel, did better in the fourth quarter at Target and Walmart.
Meanwhile, the losers are really losing.
Foot Locker (FL) and Victoria's Secret (VSCO) had awful quarters, and the market bid down their stock prices by more than 30% in a day this week.
Nordstrom (JWN) warned sales trends stayed soft at its full-price banner. Macy's (M) quarter was bad.
"The customer has a choice, and they're choosing us," Horowitz said.
The Fed has a choice too on rates ... and consumer resilience suggests its choice should be easy in 2024.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter/X @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
