VSCO - Consumer stocks are in the spotlight with student loan repayments and food disinflation in the mix

2023-06-25 11:35:44 ET

Some consumer sector stocks face potential headwinds in the back half of the year with the resumption of student loan repayments and a likely trend of food disinflation.

The debt ceiling agreement struck in May ensures student loan payments will resume in September after a ~3.5 year pause. While the Supreme Court is due to rule in coming weeks on the Biden Administration’s debt relief plan, which would cancel up to $20K of student debt for Pell Grant recipients and up to $10K for other low income borrowers, some level of repayments will begin regardless of how the high court rules. Over 45M people have student loans, with the average balance at around $35K. Of note, about 40% of Millennial and 25% of Gen X households have student loan debt.

Analysts believe U.S. consumers with student loans will likely disproportionately reduce spending on soft goods in comparison to other categories as they shift funds to pay down debt. Wells Fargo estimated the upcoming student loan repayment headwind of up to $6B per month could impact discretionary consumer spending by 1% to 2%. The firm noted Dick's Sporting Goods ( DKS ), Best Buy ( BBY ), Target ( TGT ), and Ulta Beauty ( ULTA ) screen the worst within the sector for potential exposure to a negative impact from student loan payments starting again. Gordon Haskett warned the resumption of federal student loan payments for ~27M borrowers in September could weigh on Q4 order volumes for DoorDash ( DASH ) with delivery costs well above traditional carryout. DoorDash ( DASH ) lost its bull rating at the firm due in part to the student loan repayment issue. For its part, UBS thinks brands and retailers more likely to be negatively impacted by the student loan issue include 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 ).

Meanwhile, food disinflation is also seen as a risk in the consumer sector. JPMorgan's proprietary food disinflation tracker indicates a moderation in food inflation could noticeably impact the same-store sales marks for Walmart ( WMT ), Costco ( COST ), Target ( TGT ), Tractor Supply ( TSCO ), and BJ's Wholesale Club ( BJ ). Food retailers are also expected to become more aggressive with pricing in order to support traffic and unit sales mid a tougher macroeconomic backdrop. Bank of America thinks shoppers will also continue to favor value and variety following the shock of seeing grocery prices rise +25% from 2019 to 2022. Grocery store operators such as Kroger ( KR ) with a strong private label business are seen as well positioned for the new dynamic. For packaged food and meat companies the question may boil down to how much pricing power will remain in Q3 and Q4. UBS highlighted that companies such as General Mills ( GIS ), Hershey ( HSY ), Coca-Cola ( KO ), PepsiCo ( PEP ), Kraft Heinz ( KHC ), Kellogg ( K ), Campbell Soup ( CPB ), Cal-Maine Foods ( CALM ), Tyson Foods ( TSN ) and Mondelez International ( MDLZ ) may face difficulty in relying on pricing to continue the sector trend of gross margin and EPS beats with their earnings reports.

On Seeking Alpha, analyst Danielle Park noted recessions are typically disinflationary and deflationary, which could be good news for consumers, but not for corporate profits.

More on consumer discretionary stocks:

• Packaged food stocks will face tricky sales growth comparisons after a year of inflation
• Food prices are still high - will these stocks benefit?
• Seeking Alpha's Quant Rating across the food sector
• Consumer discretionary stocks with the highest Seeking Alpha Quant Ratings
• Consumer staples stocks with the highest Seeking Alpha Quant Ratings

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