Americans are expected to spend less and look for discounts this holiday season, according to a new CNBC survey of retail logistics executives. That desire to save money at a time when most people need to shop would favor TJX Companies’ ( TJX ) discount brands and Costco’s ( COST ) bargain prices. According to the latest CNBC Supply Chain Survey, released Friday, 71% of respondents expressed concern that consumers will cut back on vacation spending in response to inflation. Meanwhile, roughly two-thirds of those polled by CNBC expect consumers to look for discounts. Along with an already cost-saving consumer, the value customers can get at TJX-owned TJ Maxx, Marshalls and HomeGoods, as well as Costco, plays directly into our investment thesis on both stocks during these times of economic uncertainty due to the Federal Reserve’s insistence . that problematic inflation has not yet been defeated. The Fed on Wednesday suspended a series of interest rate hikes but signaled that two more were likely this year. Inflation currently remains high, although the trend in recent months has been a smaller increase. The softer demand for discretionary shopping recently reflects consumers’ concerns about higher prices as they try to prioritize the essentials. For example, Home Depot ( HD ) expects total and same-store sales to decline between 2% and 5% in fiscal 2023. It also forecast a 7% drop in diluted earnings per share (EPS) for the full year. and 13% as DIY buyers backing away from home improvement projects. Home Depot, which last month reported its biggest quarterly sales loss in about 20 years, stuck to its previous full-year outlook at its Investor Day last week. to report lower forecasts for the rest of the year. Management updated its sales guidance for fiscal 2023 to a decline of 6.5% to 8% from a previous estimate of 3.5% to a decline of 5.5% as “consumers are forced to have more choices about how they spend their money, CEO Mary Dillon said during the company’s earnings call last month. Sure, consumers spent more than expected in May as government retail sales rose 0.3% for the month earlier this week. That’s more than the 0.1% estimate. Tuesday’s consumer price index showed a 4% year-over-year increase in May, down from April’s 4.9% and a huge drop from the peak of the Covid pandemic of 9.1% in June 2022. Although cooling inflation appeared to lift some weight on Americans ‘ back last month, retailers are still preparing for the wary shopper ahead. Wall Street believes that in an effort to meet the pressured consumer, the right inventory will set successful retailers apart from the rest of the pack. COST YTD mountain Costco YTD performance Cowen named Costco the best idea for 2023, citing steady traffic trends, record renewal rates and solid membership fee income. Importantly, analysts also highlight Costco’s prudent inventory management as a “catalyst for solid execution going forward” in a recent research note. The wholesaler, analysts said, plans to expand its food product range to offset slower discretionary sales. The firm said Costco faces “gross margin pressure” as supply chain costs decline. These “additional gross profit dollars could be invested in stronger price gaps and could yield [higher] mid- to single-digit traffic up.” We think the possibility of a membership fee increase and special dividend at some point in the future would be a nice icing on the cake and keep us as long-term owners of the stock. Asked about membership prices on last month’s earnings call, CFO Richard Again, Galanti did not suggest that a fee increase was imminent, though he acknowledged that it would “happen at some point.” TJX YTD mountain Year-to-date performance of TJX companies In a separate research report, JPMorgan said TJX is best positioned to has captured consumer demand. The off-price retailer’s 46-year history of offering value “resonates with consumers in a variety of economic environments,” the analysts said. They also like TJX’s “consistent execution” in both inflationary and recessionary periods, “given that 1 200 TJX shoppers purchase good/better/best merchandise that appeals to a broad income and age demographic.” In its fiscal year ending Feb. 3, 2024, TJX expects total comparable store sales to grow 2% to 3%. Management said it sees no deterioration in demand because it offers best-in-class value and the treasure hunt that consumers love. In particular, the company sees a clearer path to improving profitability to pre-pandemic margins. Bottom Line In a challenging retail environment where consumers are expected to spend less and look for discounts, we stick with retailers that offer quality merchandise at value prices, and those are consistently TJX and Costco. “We have two of the best retailers right now,” Jim Cramer said during the Investing Club’s June monthly meeting on Wednesday. “TJX because there is so much excess inventory in the system and TJX can choose from many department stores and Costco because it offers the cheapest items,” he explained. We are encouraged that TJX is adding value to consumers under pressure in an inflationary environment and that it is performing solidly in a slower economy. This gives us more confidence that the outlook for the off-price retailer looks positive for the second half of the year and that this is the best way to play the current retail environment. We continue to consider Costco a best-in-class operator and remain big fans of the club’s membership model, value proposition and strong customer loyalty. During inflationary periods, Costco can keep prices low and attract new members. We recently sold COST stock to take some profit. That selloff came on Wednesday after Costco’s stock had a solid 9% run following its last earnings report in May. (Jim Cramer’s Charitable Trust is long TJX, COST. See the full list of stocks here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive trade alerts before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling shares in his charitable trust’s portfolio. If Jim was talking about stocks on CNBC TV, he waits 72 hours after the trade alert is issued before he executes the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. 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Shoppers enter and leave a TJ Maxx store at the Mall at Prince George’s on August 17, 2022 in Hyattsville, Maryland.
Chip Somodevilla | Getty Images
Americans are expected to spend less and look for discounts this holiday season, according to a new CNBC survey of retail logistics executives. This desire to save money at a time when most people have to shop would be beneficial TJX Companies‘ (TJX) discount brands and Costcofavorable prices (COST).