Company Callouts:
Long RH. RH opening up the Europe market makes for easy growth compares in forward years. It’s coming off a base of zero. Year one comes in lower than it might in a good economy, but it stacks up growth in the region for several years ahead.
Short LOW, HD, FND. With sticky inflation, high rates, and depressed existing home turnover, home improvement setup remains bearish.
Short GOOS, JWN, LOVE. Higher Income consumer slowdown risk from student loan payments returning and tightening lending standards means further demand risk for these names.
The Hedgeye Macro team presented its 3Q mid quarter update today. The setup continues to be bearish for retail. The team is modeling a material GDP slowdown in 4Q23 and 1Q24. Then given the comparison setup, inflation is likely to remain sticky - around 3.2% through January. That is in part driven by the base effects of the energy inputs, with those inputs also rising in recent months. The sticky inflation will keep the Fed hawkish, bearish in itself for the direction of demand, but then that inflation will continue to eat into the discretionary spending bucket, pressuring retail sales.
The big incremental risk for retail beyond inflation is student loan payments returning. The macro team highlighted data on the income level, debt load, and FICO score for various bearers of student loans. The data suggests clear risk to discretionary spending for high income consumers. That risk is perhaps amplified by the fact that lending standards are tightening, and high earners with high debt loads are seeing discretionary spending pressure from both having to make the payments and having reduced access to credit.
Bearish China, Europe Recession Risk. The Macro team is bearish on China and Europe. On the European read the data supports Europe being in a recession. As it relates to retail, global brands have generally seen Europe outperform the US, benefitting from travel demand and later innings of re-opening. However, the continued macro weakness and recent rate hikes are likely to be bearish for forward demand in the region.
