Here's what we've learned about the health of the consumer this earnings season

Published Mon, Nov 7 202212:18 PM EST

A slate of earnings reports in recent weeks show consumers are tightening their belts and prioritizing essential purchases as interest rates rise and inflation persists. But the Club's retail holdings — Costco (COST) and Procter & Gamble (PG) chief among them — appear well positioned to manage these shifting consumer behaviors in a worsening economic climate. This corporate earnings season comes as the U.S. Federal Reserve on Wednesday raised its short-term borrowing rate by 75 basis points, to the highest level since Jan. 2008 , making debt more expensive for Americans and cutting into discretionary spending. At the same time, inflation has proved unrelenting, with consumer prices up 8.2% year-on-year in September, according to the U.S. Bureau of Labor Statistics. But even as consumers have become more discerning on spending, demand for consumer staples like food, beverages and household goods has held steady. Companies like P & G and Costco have benefited, with sales rising in the last quarter. Conversely, e-commerce giant Amazon (AMZN) has seen sales growth slow, in part due to consumers scaling back online purchases. Despite the shift in spending habits, U.S. consumers are overall in a relatively solid financial position, with lenders like Club holding Wells Fargo (WFC) demonstrating a strong uptick in credit card spending that translated into revenue growth at the bank in the third quarter. Slower discretionary spending With fears of an imminent recession mounting, consumers are growing conscious about where they spend their hard-earned dollars. S & P 500 companies cited sluggish consumer demand similar to levels not seen since the height of the Covid-19 pandemic, according to Bank of America's earnings tracker that studies consumer discretionary spending. Holiday spending so far this year has fallen 5% from 2021 levels and is on a "downward trajectory," a holiday spend tracking analysis from Barclays showed. The research also demonstrated that shoppers have started gift buying earlier this year, with a penchant for more affordable items. Analysts at Barclays said the biggest "downbeat sign" came from Amazon . "We are seeing evidence that the consumer pullback is persisting, if not, worsening," the analysts wrote in a note last week. However, the slower start to holiday shopping came as a surprise to analysts, especially after Amazon launched a second sales event for Prime subscribers last month. The event was expected to stimulate sales at the start of the holiday season but reportedly fell short of Amazon's Prime Day in July . "With consumers seemingly not responding to promotional activity...we expect to see a reversion to pre-pandemic like clearance activity which will accelerate as we move into December and January," the Barclays analysts argued. Amazon's stock is down around 46% year-to-date, and was trading at around $90 a share Monday. Preference for consumer staples The third quarter showed consumers focused their purchases on essential items, while limiting spending on clothes or entertainment, allowing for moderate growth at retailers that sell consumer staples. Costco 's (COST) total sales rose by roughly 15% year-on-year, to $70.76 billion, in its fiscal fourth quarter, while reporting record membership renewal rates of 92.6% in the U.S. and Canada. For October, the retailer reported sales growth of 6.7%, slower than the growth seen in both September and August. Management has acknowledged sales growth is lower in 2022 but said its "beating the rest of the industry." Still, Wells Fargo on Monday downgraded Costco to equal weight from overweight and lowered its price target to $490 from $600. "While value should remain important for customers, COST does have exposure to…a weakening consumer," posing downside risk for the retailer, Wells Fargo analysts wrote in a note. In response, Jim Cramer on Monday called the revision a "big mistake if we are going into a recession." To that end, analysts at Morgan Stanley remain bullish on the retailer. "We think COST is planning for a solid season, particularly in areas where consumers pulled back over the last two years," the analysts wrote in a recent research note. Costco's stock was trading down nearly 1%, at around $482 a share on Monday. Meanwhile, P & G reported 7% sales growth year-over-year for its fiscal-first quarter, despite having increased prices to preserve its profit margins. But consumers are making "less frequent purchases" or "trading down to PG's portfolio of lower price points," analysts at JPMorgan wrote in a recent note. "Consumers [are] relatively more price conscious but PG [is] still keeping relatively resilient volume performance," they added. P & G was trading up around 0.6% in midday trading Monday, at roughly $135.3 a share. Stable credit quality While consumers have less disposable income, they've still been able to manage their finances and meet debt obligations by making consistent monthly credit card, auto and student loan payments, data shows. Wells Fargo's third-quarter results demonstrated historically low delinquencies and higher repayment rates across the bank's portfolio. And in a roundup review of third-quarter bank earnings last week, JPMorgan said credit quality is generally strong. "We expect credit losses to slowly normalize over time," the analysts wrote in a note. Wells Fargo's credit card revenue increased 8% year-on-year, while management said credit card spending was up 25%. At the same time, Visa (V) processed a total of $192.5 billion in transactions over a 12-month period ending Sept. 30, a 17% year-over-year increase. The credit card company cited "very strong" travel demand in its latest quarterly results, while competitor Mastercard (MA) said consumer spending remains "resilient" when it reported for the last quarter. Bottom line Overall, consumers have been able to absorb inflationary pressures. But with less money in their pockets spending habits are becoming more defensive, as financial conditions tighten. This is why we're diversified with consumer staples companies with recession-resistant qualities that can still provide value to consumers in a difficult economy, while also delivering durable earnings for shareholders. (Jim Cramer's Charitable Trust is long AMZN, AMD, PG, COST, STZ, WFC. See here for a full list of the stocks.) 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People shop in a supermarket as inflation affected consumer prices in New York City, June 10, 2022.

Andrew Kelly | Reuters