Weekly Wisdom – August 24, 2023

By Hightower Great Lakes on August 24, 2023

Shopping in the Home Section

Last week, we learned more about the consumer from retail sales data and big box retailers that reported quarterly earnings. In July, retail sales increased +0.7% m/m and are now up +3.2% y/y, led by strength in non-store and health and personal care categories. On a two-year stack, retail sales have accelerated to +13.4% from +11.1% seen in June.[1]

As we have been writing for months, this suggests that the consumer is healthy, driven by the tight labor market and higher wages. We are also encouraged by the continued strength in the services side of the economy – which makes up 70% of consumption.

The strength in the consumer suggests they can withstand the puts and takes within the economy. Within the retail sales report from last week, the retail sales control group rose 1% y/y, which is another positive read for underlying economic momentum and stronger GDP.

Chart 1: Retail Sales Year-Over-Year Growth Rates by Category – July[2]

This week, earnings from retailers confirmed the macro data. Commentary from Walmart (WMT) noted that discretionary spending outperformed its Q2 expectations; SSS is up 6.4% and International is up 11%, with double digit growth in all geographies. TJX Companies (TJX) issued similar commentary with 6% SSS, and its Homegoods segment rising 4%. Profitability improved at Target and Home Depot, where both surpassed margin expectations handily. 

Building Demand

New home sales are at levels last seen in March 2022 – signaling underlying demand in housing. The data beat expectations for July, coming in at 714,000 new home sales, versus the consensus at 706,000, and beating the June 697,000 report.

To be clear, existing home sales have been sluggish as 83% of existing homeowners have mortgages under 5%. Who would sell a home to see an increase in their mortgages with rates above 7%? This bodes well for home improvement companies, as consumers stay in their existing homes longer.

Chart 2: New Privately Owned Houses Sold

Another major theme in Q2 is the continuation of retailer de-stocking, as companies such as Walmart (WMT), Target (TGT), Home Depot (HD), TJX Companies (TJX) and Dick’s Sporting Goods (DKS) have all reported lower inventories compared to 2Q22. Companies are looking to become leaner so that they can quickly adjust to the dynamic consumer. This has positive implications for margins and operating leverage as demand recovers. 

Chart 3: Retail Inventories Reapproaching Normal Levels of Expansion[3]

What’s Something Else That Completes a Home? Pets!

One subsector that is often overlooked when it comes to the healthcare sector is animal healthcare. As of 2022, the animal healthcare industry’s total addressable market was valued at $58.66 billion. Not only is the total addressable market currently significant, it is also expected to grow at an 8.8% compounded annual growth rate from 2023 to 2030.[4]

A contributing growth driver in this space is people’s love for their pets. In fact, 86% of pet owners say that they are willing to spend whatever it takes to keep their furry friend healthy. This is reflected in the numbers with U.S. vet clinic revenue and spend being up 9% in the first half of this year. Vet clinic visits were flat during the first half of the year due to the normalization of demand, so companies made up for this with pricing.[5]

Two of the major players in the animal healthcare industry are Zoetis (ZTS) and Elanco (ELAN). Both of these companies are trading below their historical price-to-earnings averages and may be able to capitalize on the growing market. It is important to know that both companies are spinoffs of major U.S. pharmaceutical companies.

Zoetis spun off from Pfizer (PFE) in 2013, and Elanco from Eli Lilly and Co. (LLY) in 2019.[6] Spinoffs allow a part of the business to shine on its own, opposed to being buried under multiple other segments within a larger business. This allows investors to invest in a more concentrated business or theme.

Additionally, spinoffs historically outperform. Of the 377 spinoffs that have been completed since 1999, the shares of the spinoff companies have outperformed their parent companies by a median of 4% after their first year, and by 7% over two years.[7] These outperformance statistics are likely factors of an increasing volume of corporate spinoffs.

As of March, there have been 59 spinoffs announced in 2023, which is more than were announced in March of any of the last five years.[8] Overall, companies within the animal healthcare subsector look cheap, benefit from being spinoffs, and are operating in a large and growing market that is driven by our enduring love for pets.

Click here to read last week’s Weekly Wisdom (8/16).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Goldman Sachs Macro Research. As of August 15, 2023.

[2] Source: Morgan Stanley. As of August 15, 2023. 

[3] Source: FactSet (chart). As of August 22, 2023.

[4] Source: Grand View Research. As of January 24, 2023.

[5] Source: Zoetis Second Quarter Earnings call. As of August 8, 2023.

[6] Source: Seeking Alpha. As of December 13, 2022.

[7] Source: CNN. As of February 17, 2023.

[8] Source: Bloomberg. As of March 31, 2023.