The explosive growth of Temu, the U.S. arm of Chinese e-commerce giant Pinduoduo , could spell trouble for some major retailers, according to Bank of America. Temu offers products directly from manufacturers worldwide, allowing it to keep costs and prices low. It generated sales of around $12 billion in 2022, equivalent to 12% of Target’s sales, according to the Wall Street bank’s analysis of credit card data. Just six months ago, Temu’s sales were only 4% of Target’s. Consumers have welcomed Temu’s rapid growth, but competitors are likely to lose market share and could see smaller profits in the near future. “Retailers targeting young adults at low price points are particularly vulnerable,” said Bank of America’s analysts, led by Thomas Thornton, in a note to clients on Nov. 17. The analysts say Temu’s growth has been fueled by aggressive advertising using influencers, social media and search, with daily active users reaching 40% of Amazon’s level. Retailers at risk The BofA analysts say retailers competing on price alone are particularly exposed to Temu’s disruption. They suggest Old Navy and Kohl ‘s private brands are “at risk of being out-priced.” Fashion-oriented companies like Revolve , Urban Outfitters , and American Eagle could also be undercut on price, the bank said. European retailers aren’t immune to Temu’s disruption either. Bank of America believes online fashion retailers like Boohoo and Asos are vulnerable to losing their market share, while H & M is more exposed than Zara parent Inditex , which can leverage supply chain speed and higher prices. Despite the broad risks to Western retailers, Bank of America cautioned that Temu’s rapid expansion may not be sustainable in the long term if the appetite for losses and ad spending by its parent wanes. However, Pinduoduo is expected to grow ad spending again in 2024, which could help Temu avoid slowing down in the medium term, the analysts said. Insulated retailers In the United States, the analysts suggest Walmart and Target have advantages that should insulate them. Those include long-standing consumer trust, perception of product quality, and ease of access. Bank of America also thinks Five Below will be resilient as its value proposition goes beyond price. Just like the grocers, Five Below’s in-store experience creates urgency and drives repeat visits in a way online shopping does not, the analysts said. Separately, analysts at UBS investment bank also see Temu’s growth in a similar vein. “Overall, we think the risk that Temu will significantly disrupt many of these retailers is limited,” the Swiss bank’s analysts wrote in a note to clients on Nov. 20. UBS said Costco , ULTA , Home Depot , Lowe ‘s, and auto part retailers were the “most insulated” from the rise of the Chinese e-commerce app. — CNBC’s Michael Bloom contributed to this report.
Tag: American Eagle Outfitters Inc
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5 things to know before the stock market opens Thursday
A trader work on the floor of the New York Stock Exchange (NYSE) in New York City, May 24, 2023.
Brendan McDermid | Reuters
Here are the most important news items that investors need to start their trading day:
1. Plodding along
Stocks are coming off a rough day. All three major indices took a dive Wednesday after debt ceiling negotiations yet again yielded no deal. We could be in for a jumbled Thursday, however, after both Fitch’s warning about the U.S. debt rating and Nvidia’s blowout earnings report (more on both below). Investors will also chew over a new slate of retail earnings, including Best Buy and Dollar Tree, as well as pending home sales data and weekly jobless claims. Follow live market updates.
2. One week to get it done
U.S. House Speaker Kevin McCarthy (R-CA) speaks with reporters at the U.S. Capitol in Washington, U.S. May 24, 2023.
Jonathan Ernst | Reuters
The Treasury Department has warned the U.S. could run out of money to pay its bills as soon as June 1, which is exactly one week from Thursday. So, what’s the status of negotiations between the White House and House Speaker Kevin McCarthy’s team? Improving, but still not where they need to be. The House, in fact, will be allowed to go home for Memorial Day weekend, although they’re on call to come back for a vote. Meanwhile, the possibility of an unprecedented default on U.S. debt is ratcheting up the external pressure on Congress to raise the debt ceiling. Fitch put the U.S.’s triple-A status on rating watch negative, citing the tense debt talks.
3. Blowout report from Nvidia
Nvidia headquarters seen in Santa Clara, California, Feb. 22, 2023.
Justin Sullivan | Getty Images News | Getty Images
Nvidia shares soared after the chip maker posted a big earnings beat and offered sales guidance way above Wall Street’s estimates. The stock was already up 109% this year going into the earnings report after the bell Wednesday. The company is riding an artificial intelligence-driven wave of demand for chips. Its data center business posted a 14% increase in quarterly revenue. As CNBC’s Kif Leswing points out, this robust result shows how important AI chips are becoming for cloud vendors and other companies running a lot of servers.
4. Ups and downs at the mall
Customers ride an escalator at The Galleria shopping mall after it opened during the coronavirus disease (COVID-19) outbreak in Houston Texas, May 1, 2020.
Adrees Latif | Reuters
It’s a tale of two mall retailers. American Eagle Outfitters‘ shares plunged 19% in off-hours trading after the company said Wednesday afternoon it lowered its outlook for revenue and operating income for the year, citing a slowdown in sales heading into the current quarter. American Eagle also had a tough act to follow. Before the bell Wednesday, rival Abercrombie & Fitch posted a surprise profit and raised its guidance for the year. That, in turn, sparked a monster rally in the stock. Shares surged 31%, accounting for nearly all of Abercrombie’s gains this year.
5. Awkward …
Florida Gov. Ron DeSantis speaks during the annual Feenstra Family Picnic at the Dean Family Classic Car Museum in Sioux Center, Iowa, May 13, 2023.
Rebecca S. Gratz | The Washington Post | Getty Images
In Twitter Spaces, no one can hear you stream. At least that was the case Wednesday night for Florida Gov. Ron DeSantis, Twitter owner and Tesla CEO Elon Musk and conservative tech investor David Sacks. DeSantis was set to announce his (already established and widely known) candidacy for presidency at 6 p.m. ET, but numerous glitches and crashes forced the men to shut down the livestream after about 25 minutes. They blamed server issues because more than 500,000 people piled into the stream. They started a second one, which went much more smoothly from a tech perspective and drew about 300,000 listeners. DeSantis supporters spun the disastrous rollout as a positive, saying it was a sign that DeSantis was generating excitement. But, as CNBC’s Kevin Breuninger notes, an audience of that size would be considered a ratings disappointment on primetime cable news.
– CNBC’s Sarah Min, Christina Wilkie, Emma Kinery, Darla Mercado, Kif Leswing, Gabrielle Fonrouge, Melissa Repko and Kevin Breuninger contributed to this report.
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Five takeaways about the consumer from Walmart, other retailers after a big week of earnings
A Target department store in North Miami Beach, Florida, May 17, 2023.
Joe Raedle | Getty Images
More grocery purchases, fewer ambitious do-it-yourself projects and last-minute splurges at the store.
This week, some of the biggest retailers in the country reported earnings and described how their customers are shopping. As Home Depot, Target and Walmart reported their quarterly sales and shared full-year outlooks, the companies offered up the latest clues about the health of the American consumer and previewed what could be ahead for the economy.
Some smaller retailers also offered warning signs for the current quarter and this year.
Next week will give even more insight into the retail industry and economy. Best Buy, Lowe’s, Costco, Dollar Tree and Kohl’s are among the earnings on tap. Some mall retailers are also reporting earnings, including Gap, American Eagle and Abercrombie & Fitch.
Here are some of the emerging themes.
Sales trends have weakened
So far, at least five retailers — Target, Walmart, Tapestry, Bath & Body Works and Foot Locker — have spoken about sales trends across the country getting worse.
As the three-month period went on, shoppers spent less, especially on discretionary merchandise, Target CEO Brian Cornell said on a call with investors. Walmart noticed the same pattern.
Both big-box retailers reported a sharp sales drop after February.
Walmart’s Chief Financial Officer John David Rainey attributed the decline, in part, to the end of pandemic-related SNAP benefits and a decrease in tax refunds.
Cornell said headline-grabbing events could have shaken consumer confidence too. He pointed to the March banking crisis. Silicon Valley Bank collapsed that month, sparking fears of broader economic woes.
Bath & Body Works saw sales fall off in March. Yet, sales recovered in April as the retailer turned to a common playbook: promotions. It got a boost as customers spent money at sales events toward the end of the quarter, CFO Wendy Arlin said on a Thursday earnings call.
Foot Locker also said it may have to motivate shoppers with markdowns for the rest of the year. The company cut its full-year forecast Friday, as it reported earnings that missed expectations. CEO Mary Dillon said in a statement, “sales have since softened meaningfully given the tough macroeconomic backdrop.”
On a call with investors Friday, Dillon said the sneaker seller’s sales got hurt by lower tax refunds and high inflation as customers spent more on food and services. While she said sales rebounded in April, “they did not improve nearly to the extent we expected, and that weakness has continued into May.”
A few other retailers that reported earnings had specific factors working in their favor.
When Tapestry, the parent company of Coach and Kate Spade, reported earnings last week, the company said sales softened as the quarter progressed and into April as consumers became more cautious.
But it has a factor going for it that some other retailers don’t: A growing business in China and other international markets to offset some of those softer sales.
Home Depot bucked the slowing sales trend, but that may have to do more with what it offers than consumer health.
Spring is peak season for home improvement. The retailer’s comparable sales in the U.S. declined 4.6% in the quarter versus the year-ago period. In February, its comparable sales were down 2.8%. March was its weakest month of the quarter, as comparable sales fell nearly 8% year over year in the U.S.
Home Depot’s trends were still negative in April but saw a slight improvement as comparable sales slid 3.7%, according to CFO Richard McPhail. Customers may have been buying more spring items such as potted plants.
Inflation is still a key factor
Inflation is easing, according to a Labor Department report this month. Yet, that’s cold comfort for shoppers who are still paying a lot more at the grocery store than they were a few years ago.
Stubbornly high prices, especially for food, are a storm cloud that hangs over many families who shop at Walmart, and looms over the retail industry as a whole, the big-box giant’s CEO Doug McMillon said. On a call with investors Thursday, he called the persistent inflation “one of the key factors creating uncertainty for us in the back half of the year.”
“We all need those prices to come down,” he said on the call. “The persistently high rates of inflation in these categories, lasting for such a long period of time, are weighing on some of the families we serve.”
For example, he said general merchandise costs in the U.S. are lower than a year ago, but still higher than two years ago. In dry grocery and consumables categories, Walmart is seeing high single-digit to low double-digit cost inflation on items such as toilet paper or paper towels. For food, inflation has climbed more than 20% on a two-year basis, according to Walmart’s Rainey.
A shopper browses the eggs section at a Walmart store in Santa Clarita, California.
Mario Anzuoni | Reuters
Walmart is feeling the inflation crunch even though it is better positioned to manage higher costs than other retailers. As the nation’s largest retailer and biggest grocer, Walmart can use its scale to manufacture private-label merchandise or negotiate with vendors over price.
One rare item that dropped dramatically in price? Lumber. Home Depot cited the sharp price decrease as a factor that contributed to its fiscal first-quarter revenue miss.
In plenty of other categories, however, inflation is still driving a higher average ticket for customers, Home Depot CEO Ted Decker said on an earnings call Tuesday.
Consumers are spending on needs, not wants
Target, Home Depot and Walmart all saw a noticeable pattern: fewer pricey and fun items in shopping carts.
At Home Depot, customers bought fewer big-ticket items such as appliances and grills in the fiscal first quarter.
Home projects got more modest, too, Decker said on an investor call. Contractors and other home professionals noticed a change from large-scale remodels to smaller renovations and repairs.
Decker said consumers’ increased focus on value could be contributing to that shift, along with an uptick in spending on traveling, dining out and other services. He added some homeowners already tackled big projects and bought some high-priced home items during the early years of the Covid-19 pandemic, leaving less for them to do or to buy now.
The trend extended beyond home improvement.
Customers at Walmart have become more selective when shopping for electronics, TVs, home items and apparel, Rainey told CNBC. The items have become a tougher sell and when customers do buy them, they often wait for a sale, he said.
At Target, sales declined in some discretionary categories as much as low double-digits as customers bought less clothing and home decor, Chief Growth Officer Christina Hennington said on an investor call. Groceries and essentials drove a bigger portion of the retailer’s quarterly sales.
One exception? Beauty. Hennington said Target’s beauty category was its strongest in the fiscal first quarter. Sales grew in the mid-teens year over year, showing shoppers are still willing to replenish the cosmetic case and get a new tube of lipstick.
Weather dampened demand (literally)
Weather has not worked in retailers’ favor, at least not yet.
As the weather turns warm and sunnier, it can inspire shoppers to buy summer dresses, beach towels or gardening supplies.
Yet, Home Depot said cooler and wetter weather in California and parts of the western U.S. hit its sales, contributing to its biggest revenue miss in more than 20 years.
Walmart is eager for warmer weather too. Sam’s Club has noticed slower sales of patio sets, perhaps because of the later-to-hit spring weather, its CEO Kath McLay said on an investor call. Walmart has seen a sharp drop in air conditioner sales at its big-box stores, its CFO Rainey said.
“We’re ready to get some spring or summer weather,” he said on a call with CNBC.
Target noted it’s looking forward to another upcoming season: back-to-school.
The discounter expects to get a sales boost in the back half of the year due to the big shopping season, Hennington said on an investor call. She said the return to classrooms and college dorms triggers sales across almost every department of its store, from lunch ingredients in the grocery aisles to new outfits in the kids’ clothing department.
Shoppers have become more last-minute
Retailers may be saying so long to the days of stockpiling and early shopping.
Company leaders said there are signs shoppers are reverting to some of their old ways.
At Walmart-owned Sam’s Club, McLay said shoppers are not just opting for lower price points. They’re also shopping later for seasonal items. For example, she said, customers used to buy patio furniture just as soon as it was set at the stores.
“Now we’re seeing people wait a little bit later into the season,” she said.
It saw a similar pattern with Mother’s Day sales, she said.
McLay said that may indicate people have returned to shopping habits of 2018 and 2019. The trend could be fueled by shoppers’ reluctance to open their wallets or because they’re not as worried about out-of-stock items — or a combination.
At Target, shoppers have also embraced more procrastinator tendencies, especially for discretionary items such as apparel.
“Guests are shifting to shop more just in time in these categories, as they wait until the last moments before key events to invest in new decor or wardrobe refreshes,” Hennington said on an earnings call.
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Cramer’s week ahead: Markets will do ‘much better’ during the next four weeks
Stocks rose on Friday but ended the turbulent week down.
