Weekly Wisdom – January 12, 2023

By Hightower Great Lakes on January 12, 2023

Is Something Brewing?

While it is still the quiet before the (earnings) storm, we have been able to learn some key information from a few companies. Beginning with Nike (NKE), they highlighted, positively, that their business is not experiencing a consumer demand problem.

Nike was able to grow total revenue +17% y/y, driven by a very strong report out of North America, with +30% y/y total revenue growth in a challenging environment.¹ Besides the strength here, we are also picking up on a strong direct-to-consumer trend that may have some legs as Nike looks to benefit from their dominant position.

Consumer strength has also been noted in Costco (COST) as their December sales came in better than expected, same store sales +7.3% y/y, traffic +4.6% y/y and overall global ticket up +2.8% y/y.² Costco highlighted strength in bakery/produce, food and more strength in tires, sporting goods, apparel, and health and beauty.

This was very similar to Dollar General’s (DG) earnings a few weeks ago, which were highlighted by strength in consumables, average ticket and transactions – which can be viewed as a trade-down benefit as consumers look for deals.³

Other preannouncements, such as Macy’s (M) and Lululemon (LULU), also told us a parallel story to the companies mentioned above. While Macy’s is expecting sales to be at the low end of the range, they also shared how Bloomingdale’s continued to outperform, as there is strength within the higher-end consumer.

They also mentioned how they are in a better inventory position going into this year, as they left capacity to adjust to consumer strengths.⁴ Lululemon was able to raise revenue projections based on the strong pricing power they have over their customer base, but on the contrary, they had to lower expectations for their gross margins as they clear excess inventory.⁵

The overall theme is that demand is persistent, and this bodes well for the U.S. economy as consumption accounts for two-thirds of domestic GDP. Not to mention, there is $5 trillion dollars sitting in money market funds, which can be viewed as a buffer for stock prices.⁶

Inventories Still Higher, but Better

The inventory conversation was at the forefront of retail struggles for most of 2022 and is beginning to show signs of improvement. Looking back, these issues were first showcased by Target (TGT) and Walmart (WMT) in their Q1 reports.

Both have showed signs of improvement since, as Target’s Q1 inventory was +43.1% y/y and came in at +14.4% y/y in Q3.⁷ Walmart’s management has handled the situation better, as its inventory is down to +12.6% y/y versus +32% in Q3 y/y.⁸

With Macy’s (M) preannouncement last week, they shared that they are going to be flexible from an inventory standpoint, and even mentioned that total inventories are on track to be slightly below last year and down mid-teens relative to 2019.

Over the course of 2023, we are expecting that inventories will return back to normal-ish levels, and one of the key items of our assumption is tied to strong consumer income.

At What Cost?

The jobs market continues to be the bright spot of the economy (and the last hurdle for the Fed), and that is evident when looking at both the nonfarm payroll and ADP report we received last week.

The ADP report showed +7% y/y wage increases and +15% y/y wage increases for those that switched jobs.⁹ In addition, we saw the JOLTS number beat to the upside. The wage momentum has kept consumer confidence high, which translates directly to the companies we follow.

On the cost side of the equation, there has been some easing that is worthwhile to mention. Morgan Stanley (MS) published an informative update on their commodities index that was up +7% y/y in Q4, moderating from the 11% rise in Q3 and down -2% q/q as key protein trends were favorable sequentially.

“Protein prices saw sequential improvement each week in December, as proteins moved lower and key produce items came off the highs.” Wings, chicken breast, freight costs, and ground beef proved to be the most deflationary, in that order. This could be a tell for the upcoming Q4 earnings season that occurs over the next few weeks, and we will be monitoring companies that benefit from the trends.

Chart 1: Morgan Stanley Restaurant Commodity Index¹⁰

In addition to lower input costs, we have seen energy prices come down over the course of the last couple months. The price of Crude Oil-Brent and Natural Gas have both been printing lower numbers, as Brent is down -17.35% since its highs in early November and the price of Natural Gas is down -52.16% from the highs in late November. The combination of this should help multinational companies gain an advantage that they have been missing.

Chart 2: Historical S&P 500 Price/Earnings¹¹

Sentiment Weak, Valuations Interesting

While it is our goal as investors to focus on the present, it is also crucial to keep an eye toward the horizon and monitor the trends that are developing in real time. As we see input costs begin to trend lower, we consider how this will be perceived later in the year. We maintain an optimistic outlook for select,  high quality names that have felt the pain of 2022.

We think 2023 will be a strong year for well managed companies, and companies will benefit from cost comps through in the second half of 2023. With lower input costs such as energy, freight, and currency, there may be some subtle tailwinds that pick up steam as the year progresses.

Click here to read last week’s Weekly Wisdom (1/4).

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: CNBC. As of January 10, 2023.

² Source: CNBC. As of January 10, 2023.

³ Source: Nasdaq. As of January 10, 2023.

⁴ Source: Yahoo Finance. As of January 10, 2023.

⁵ Source: Yahoo Finance. As of January 10, 2023.

⁶ Source: CNBC. As of June 22, 2022.

⁷ Source: CNBC. As of January 10, 2023.

⁸ Source: CNBC. As of January 10, 2023.

⁹ Source: ADP. As of January 5, 2023.

¹⁰ Source: Morgan Stanley Research, American Restaurant Association. As of January 3, 2023.

¹¹ Source: FactSet (chart). As of January 4, 2023.