BIRD - Airbnb to Boston Beer rally as consumer companies deliver strong results - the joy may be fleeting

2023-07-30 10:54:00 ET

Consumer stocks from BJ's Restaurant ( BJRI ) to Skechers U.S.A. ( SKX ) rallied on Friday after data showed inflation easing and as companies beat earnings estimates. Even lesser-loved Stitch Fix ( SFIX ) jumped 10% .

The outlook, however, may be less rosy.

In a consumer sentiment survey conducted by TD Cowen in June, 62% of respondents who had student loans said they expected to cut their budgets now that payments are resuming in October. Nearly 43 million individuals have federal student loan debt, with the loan portfolio exceeding $1.6 trillion as of December, according to a Congressional Research Service report.

The U.S. Federal Reserve ratcheted interest rates higher yet again this week to the most in more than two decades as part of its efforts to rein in inflation. Rates make borrowing more expensive, including for personal loans, home equity loans and credit card debt. Top that off with renewed student loan obligations and there's a good chance there will be less money floating around to spend on flying to Istanbul, dining out at Olive Garden ( DRI ) or buying new Steve Madden ( SHOO ) heels.

Companies potentially impacted by the resumption in student loan repayments include Delta Air Lines ( DAL ), American Airlines Group ( AAL ), United Airlines Holdings ( UAL ), Crocs ( NASDAQ: CROX ), Texas RoadHouse ( TXRH ), Allbirds ( BIRD ), Peloton Interactive ( PTON ), Madison Square Entertainment ( MSGE ), Marriott International ( MAR ), Vail Resorts ( MTN ), Starbucks Corporation ( SBUX ), Chipotle Mexican Grill ( CMG ), Ulta Beauty ( ULTA ), Williams-Sonoma ( WSM ), Booking Holdings ( BKNG ) and Airbnb ( NASDAQ: ABNB ).

Inflation persists, if less so

On Friday, the U.S. Department of Commerce said consumer spending rose in June at a higher clip than income did, and inflation continued to cool from last year's peak.

The Federal Reserve's preferred gauge for inflation trends, the core PCE measure, rose 4.1% last month compared to a year earlier. That's still twice the Federal Reserve's 2% goal. Meanwhile, the personal savings rate declined to 4.3% in June from 4.6% in May.

Gross domestic product for the second quarter rose at a 2.4% annualized pace in the second quarter, ahead of the 2% expected as consumers continued to spend, a report from before the June decision by the Supreme Court to strike down U.S. President Joe Biden's proposal to cancel billions in student debt. Borrowers could have seen up to $20,000 in loans forgiven had the court not intervened.

A few weeks ago, Biden said he would forgive $39B for more than 800,000 borrowers. That still leaves more than 40 million Americans carrying debt.

In June, UBS analyst Jay Sole wrote in a research note that U.S. consumers with student loans will likely disproportionately reduce spending on soft goods versus other categories as they shift funds to pay down debt.

Sole named the following brands and retailers as more likely to be negatively impacted by this issue: American Eagle Outfitters ( AEO ), Carter's ( CRI ), Crocs ( CROX ), Foot Locker ( FL ), Canada Goose ( GOOS ) ( GOOS:CA ), Gap ( GPS ), Nordstrom ( JWN ), Nike ( NKE ), Steven Madden ( SHOO ), Under Armour ( UA ) ( UAA ) and Victoria's Secret ( VSCO ).

Dining, travel, groceries

Inflationary pressures continue to affect consumer demand as prices are still higher than they were a year ago, TD Cowen's survey showed. About 70% of respondents indicated that prices for day-to-day purchases went up versus a year ago, which is down from the highest levels from 2022. Of those seeing higher prices, 68% have either cut their spending or expect to cut, which is less than the 71% in May, but still a significant percentage.

The TD Cowen survey found that the top items being or expected to be cut include social events/dining out, travel and groceries. Notably, groceries surpassed travel and clothing in June versus May.

Higher income respondents were more likely than their lower income counterparts to be cutting spending on social events and travel. Meanwhile, lower income respondents were more likely to be cutting spending on groceries.

From Oreos to Twisted Tea

A battery of consumer companies reported earnings this week, many of which were well-received.

Skechers ( SKX ), Proctor and Gamble ( PG ) and Colgate-Palmolive Company ( CL ) were among those whose shares rallied on results that weren't always clearly positive. Boston Beer ( SAM ) rose after strong growth in Twisted Tea offset continuing challenges in the hard seltzer category.

Coursera ( COUR ) jumped after getting an upgrade from Cantor Fitzgerald to Overweight from Neutral after Q2 results beat estimates and the company reported a strong outlook — possibly dispelling fears that AI will take over.

Mondel?z International ( MDLZ ) gained on Friday after announcing a beat-and-raise quarter and bumping up its dividend. Demand for its popular brands like Cadbury, Oreo and Toblerone helped offset the price hikes that it implemented in the face of higher raw material and transportation costs.

More on consumer stocks:

• Crocs reverses post-earnings losses; Stifel upgrades
• BJ's Restaurants up on better-than-expected profits, cost savings
• QuantumScape rises to highest since August as earnings rally continues

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