Consumer spending is slowing, but these two Club retailers are well-positioned to ride out the storm

Published Tue, May 23 20234:37 PM EDT

American consumers are continuing to rein in spending amid growing concerns over the health of the U.S. economy, putting further pressure on the retail sector. Given the mounting economic uncertainty around interest rates, inflation and a potential looming recession, we're sticking with retail holdings like TJX Companies and Costco Wholesale that offer both quality and value to shoppers. First-quarter earnings results from retailers this season have shown softer discretionary spending to be the primary headwind facing companies across numerous retail categories. Home-improvement retailer Lowe's Companies (LOW) reported lower-than-expected sales on do-it-yourself purchases in its fiscal first-quarter earnings. Similarly, Home Depot (HD) reported its largest revenue miss since November 2022 during its first quarter, due to softer demand for bigger-ticket items. Sales at Target (TGT) were muted in the first quarter , while at Walmart (WMT) consumers traded down to lower-priced items and bought fewer discretionary goods. Club holding Foot Locker (FL) delivered disappointing first-quarter results , with the weakening macroeconomic situation putting a dent in CEO Mary Dillon's turnaround strategy. "The consumer is weaker everywhere," Jim Cramer said Tuesday. What Jim calls "cracks in the consumer" are the result of the Federal Reserve's policy of aggressive interest-rate hikes over the past year to curb persistently high inflation. "If the Fed is waiting for the consumer to get weak, stop waiting," Jim said. On the one hand, a weaker consumer — across most sectors, with the exception so far of travel and leisure — is exactly what the Fed has hoped to achieve through its efforts to cool the economy. Taken together with inflation showing signs of easing in recent months the central bank could be in a position to at least pause rates when it next convenes in June. That, in turn, could boost equities markets, which have been held back by higher rates. But it's a fine line to walk. If consumer spending declines too precipitously, it could help tip the U.S. economy into recession. And that would, of course, be a negative for markets. So, when it comes to the retail sector in this uncertain economic environment, we're focused on retailers that offer quality merchandise at attractive prices — Costco Wholesale (COST) and TJX Companies (TJX) being chief among them. TJX — which operates stores like T.J. Maxx and HomeGoods — reported its fiscal 2024 first-quarter earnings last week. While the off-price retailer delivered softer sales, easing costs like freight expenses allowed the company to grow earnings-per-share by 12 % on an annual basis. Overall, TJX delivered a solid quarter as it continued to offer value to budget-conscious consumers by selling high-quality inventory at low prices. Competitor Ross Stores (ROST) also demonstrated resiliency in its recent earnings print with durable sales that were in line with Wall Street's expectations, even as management struck a cautious tone on the state of the economy. Costco is set to report its fiscal 2023 third-quarter results Thursday after the closing bell. The wholesale retailer's monthly comparable-sales reports have shown Costco shoppers scaling back on discretionary items and prioritizing consumer staples. But Costco saw sales climb 1.4% in April, compared with a 1.1% decline the month prior — a sign its likely in a stronger position than peer BJ's Wholesale Club Holdings (BJ), which on Tuesday reported weaker-than-expected comparable sales, excluding gasoline, during its first quarter. Bottom line There are several factors that are stacked against consumers right now. With inflation still high, the Fed could see a need to continue raising rates. Such a move, in turn, could force consumers to further tighten their purse strings and weigh on the overall economy. But if the Fed decides to pull back and pause rate hikes sometime this year, pressure on the market — and the consumer — could ease. In the meantime, our strategy is to stick with retailers like TJX and Costco that offer great value to consumers, while effectively managing inventory. (Jim Cramer's Charitable Trust is long FL, TJX, COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Shoppers wait in a check-out line at a Costco wholesale store in Orlando, Florida.

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