Slowing growth and rising debt hit China luxury brand sales

Slowing growth and rising debt hit China luxury brand sales

Over the last several months, we’ve received several pieces of data that not only point to a slowing global economy, particularly at Europe and China but also to growing worries over the consumer’s ability to spend. We’ve covered the US data points rather thoroughly on this episode of the Cocktail Investing Podcast as part of our Middle-class Squeeze investing theme. When it comes to China, from the CEIC shows why luxury goods companies associated with our Living the Life investing theme are seeing falling sales. Per the CEIC, China’s household debt as a percentage of GDP surged to 53.2% in December, from 36% five years earlier. While that remains below the global average of 62%, it’s the pace of growth that has caused concern likely leading to either a re-think or retrenchment in Chinses consumer spending.

Factor in the recent problems associated with Boeing’s 737 Max aircraft that are likely to crimp international air travel, and the outlook for luxury goods companies and others associated with our Living the Life investing theme, at least in the near-term, look for less vibrant than they have in several years. Casting a shadow as well is the latest pushout in US-China trade talks that appear to have slipped to June from March/April.

Prada SpA shares fell to the lowest close since 2016 as slower Chinese spending contributed to an unexpected drop in the Italian fashion house’s annual profit.

The Hong Kong-listed luxury group attributed a slump in Asia mostly to Chinese tourists reining in spending in Hong Kong and Macau because of the weakness in the yuan. Other luxury brands, including Kering SA’s Gucci, have seen the impact of softer buying by Chinese tourists offset by increased spending on the mainland, but Prada failed to get a similar boost from Chinese spending at home, said Citigroup analysts led by Thomas Chauvet.

Prada’s China sales were flat for the year, a “significant swing” after a first-half gain of 17 percent, Citigroup said. Monday’s stock plunge after the disappointing earnings shaved $864 million off the company’s market value.

Chinese consumers have turned more cautious amid the slowest economic expansion in almost three decades and a trade war with the U.S. While cars and iPhones have seen bigger slumps so far, Prada’s results could spark worry that China’s newly wealthy middle class is scaling back on high-end purchases. For an industry that relies on Chinese demand for 30 percent of $1 trillion in global luxury spending, that’s a chilling prospect.

Source: Prada Loses $864 Million in Value as China Slump Hits Profit – Bloomberg

LendingTree says US Consumer Debt Approaching $4 trillion

LendingTree says US Consumer Debt Approaching $4 trillion

One of the several data streams we watch as part of our Middle-class Squeeze investing theme is consumer debt levels. According to a new report from Lending Tree, consumer debt is slated to top $4 trillion at the end of 2018. That’s worrisome for several reasons as the costs of servicing that debt have climbed over the last several quarters, eating away a disposable income that is used to power our consumer spending related economy. That pain point is a tailwind for our Middle-class Squeeze investing theme and those companies that help consumers stretch the disposable dollars they do have.

Another concern is the speed at which the last $1 trillion dollars of debt has been amassed – roughly 5 years, which is less than half the time it took for consumers to pile on the prior $1 trillion of debt.

LendingTree said in its debt report for the month of November that based on recent holiday shopping and credit card spending, credit card balances will swell by about 5 percent through the end of the year to more than $1 trillion.

That would mean that the $4 trillion level of debt is approaching for U.S. consumers, said the report.

The company said that into the first nine months of this year, the nearly $4 trillion in debt included $2.9 trillion in non-revolving debt tied to student loans, fixed loans and auto loans.

According to LendingTree, credit card APRs are more than three percentage points higher than had been seen only a few years ago, which of course translates to higher payments on that debt, and where the current average APRs are at more than 16 percent.

The data as analyzed by LendingTree shows that in just five years, in the U.S., debt holders will have increased outstanding debt by $1 trillion, having moved past the $3 trillion level in 2013. The previous $1 trillion shift, from $2 trillion to $3 trillion, took more than a decade.

Source: LendingTree: US Consumer Debt Approaching $4T |

Consumer debt above Great Recession levels is a headwind to spending and the economy

Consumer debt above Great Recession levels is a headwind to spending and the economy

We’ve seen the reports of rising consumer debt, and a new one confirms one aspect of our Cash-strapped Consumer investing theme —  “wage growth has been stagnant for five years for a large segment of the working populace — and that using cards is the result of the simple fact that people have to use them to cover their basic living expenses.“ 

Sums it up in a nutshell, don’t you think?

The downside of higher debt levels, especially in a rising rate environment, is more income goes to servicing that debt shrinking disposable income in the process. Less disposable income means either more borrowing or less spending – one is a band-aid that will only drive interest payments higher later, while the other is a headwind to consumer spending.

No matter how you slice it, the eventual end result is the same. We at Tematica see this as positive for those companies that embrace our Cash-strapped Consumer and Cashless Consumption themes even though this is a headwind to domestic economic growth.

The New York Fed’s latest report on household debt tells a very sharp story about the U.S. consumer’s relationship with debt.

Consumers in the U.S. have racked up more debt than ever — $12.73 trillion as of the end of Q1 2017, nudging past the $12.68 trillion back in Q3 2008.

Credit card debt accounts for roughly one trillion of that number.“Where did the growth [in credit card debt] come from?” Schwartz asked rhetorically.  “Is it because card companies reached further down-market to pull more near- and sub-prime credit users into the market?

Or are we seeing more growth from the more affluent consumers who have higher [credit] scores and the ability to spend more?”

Answering that question, he noted, is quite complicated ten years after the recession,  because the answer is actually both — and it depends on what tranches of borrowers one looks at. The reality he said, is that wage growth has been stagnant for five years for a large segment of the working populace — and that using cards is the result of the simple fact that people have to use them to cover their basic living expenses.“

People have been using credit just to live their lives,” Schwartz said. “They aren’t putting $10,000 on their cards to take a fancy vacation — people have living expenses, and that is what is getting put on cards. I think we have seen a lot of that happen.”

Source: Post Great Recession, Consumer Debt Is Evolving |

July Retail Sales Contradict Retailers

July Retail Sales Contradict Retailers

Tuesday’s Retail Sales report from the Census Bureau for July surprised to the upside, with stronger than expected motor vehicles and parts sales which were in sharp contrast with the weak sales reported by the auto manufacturers themselves. The report also showed an increase in sporting good sales, which is also in contrast to what we’ve seen from companies in the sector. The headline retail sales number is “seasonally adjusted,” which means it is the result of a bunch of adjustments based on models. The actual raw data for July saw a 0.8 percent decline, which is the steepest falloff for the month of July since 2012.

At Tematica Research, we are loath to rely on any one data point to reach a conclusion, particularly when the data is the result of adjustments based on assumptions that cannot be precisely accurate by definition. However, if we can find sufficient confirming data points, we become more confident. For example, the Johnson Redbook survey reported a 1.2 percent sales decline in July – so no help confirming the Census numbers from there.

We don’t give this month’s Retail Sales report much weight because not only could we not find anything to confirm it, companies in the sectors that it reports saw solid gains have reported the opposite.

The July Retail Sales Report has Sporting Goods rising 0.3 percent yet Dick’s Sporting Goods (DKS) Q2 earnings, also released yesterday, showed same-store sales growth was just 0.1 percent year-over-year versus management’s expectations for 2 to 3 percent. The 9.6 percent year-over-year increase in sales was driven by digital sales, which rose 19 percent from 2016. CEO Ed Stack cited a challenging retail environment during the quarter, with hunting, athletic, and athleisure apparel all under pressure. The big slam came from the lowered guidance to $2.80 to $3.00 for the year in contrast to consensus estimates for $3.62. Shares of DKS fell 23 percent on the day and analysts adjusted expectations to the lower end of guidance.

Foot Locker (FL) shares dropped 4.4 percent in response to the news from DKS. We’ll be watching their results closely on Friday morning. Hibbett Sports (HIBB) saw its shares drop 16.5 percent as the entire sector got a pounding thanks to DKS results. Three weeks ago the company announced that same store sales for the second quarter may be down as much as 10 percent – not exactly consistent with the July Retail Sales Report.

The July Retail Sales Report also saw solid growth in Auto Sales and Parts. We’d point out that Advance Auto Parts (AAP) reported a revenue gain of just 0.3 percent on flat comparable-store sales with a 17 percent drop in adjusted EPS and is projecting sales growth between 1 and 3 percent for the full-year. Last month O’Reilly Automotive (ORLY) warned that it would be reporting weaker-than-expected sales as well, projecting comparable store sales increases of 1 to 2 percent for the full-year.

We also found it rather odd that those areas that show the greatest strength also saw material pricing pressures – rising demand but less pricing power? Sporting goods saw sales rise 0.3 percent but prices fall 0.2 percent. Autos experienced a 1.2 percent gain in sales while prices dropped 0.4 percent. Building materials saw sales rise 1.2 percent yet prices fell 0.3 percent.

Finally, if we take a look at the consumer, the group that is responsible for all those sales, finances aren’t moving in a terribly robust direction. Without much in terms of wage gains, spending has been funded by the only other source, debt. Two years ago the savings rate was 6.3 percent, last year 5.1 percent and today has fallen to just 3.8 percent. Debt levels have again reached record levels, with auto and student loans making up a bigger piece of that credit pie. US Consumer Revolving debt reached an all-time high in June with auto loan delinquencies nearing recessionary levels. Student debt also reached an all-time high in June, with rising delinquencies as well. This makes future retail sales growth even more challenging if wages don’t rise appreciably to make up for the slowing in credit growth rates.

Just how much is the consumer struggling? Consumer staples tell the story. Johnson and Johnson (JNJ) reported a 0.8 percent drop in sales. Kimberly-Clark (KMB) reduced revenue guidance from slightly better than flat to down 1 to 2 percent, with the CEO stating that the near-term environment has become more challenging.” Toilet paper and diaper sales have become challenging! Procter & Gamble (PG) cut prices with CEO Jon Noeller reporting that growth in the U.S. markets has slowed from over 2 percent in 2016 to barely flat by the second quarter. Colgate-Palmolive (CL) saw a 4 percent drop in revenue from oral, personal and home care products.

About 20 percent of those in their last 20s and early 30s are living at home with mom and dad, a level that is virtually unprecedented in modern America. Household formation for 25 to 34-year olds has been flat over the past 3 years. Over the past 12 months, we’ve seen no growth in U.S. households.

The Bottom Line is with too many contradicting data points, we aren’t putting much weight on the July Retail Sales report. Overall, the 3-month moving average is still much weaker than historical norms.

Auto Loans and Household Income – Time for a Reality Check!

Auto Loans and Household Income – Time for a Reality Check!

In general, I tend to be a very positive person. I’m decidedly in the glass-is-half-full camp and even though no one would accuse of me being a morning person, I love watching the sunrise, large cup of joe in hand of course, with a smile on my face as I contemplate what mischief I may get myself into as the day unfolds.

I say this because the ubiquitous “Consumer is doing great” refrain is putting me in the uncomfortable position of feeling like a perpetual Debbie Downer, a role that is not in my nature, but I feel obligated because the mainstream financial media is telling a tale that needs a reality check.

If households are doing oh so fabulously, then why this?

In the first nine months of 2016, around 32 percent of U.S. vehicle trade-ins carried outstanding loans larger than the worth of the cars, a record high, according to the specialized auto website Edmunds, as cited by Moody’s.

The non-recovery recovery is lifting off and yet one-third of trade-ins during the first three-quarters of last year were underwater? The delinquency rate for subprime auto loans is at the highest level in at least seven years while used vehicle prices are dropping sharply, as the market is flooded with off-lease vehicles. The NADA’s Used Vehicle Price Index was down 8 percent year over year through February 2017, the eighth consecutive monthly decline and the sharpest monthly decline since November 2008. Asset-backed securities based on auto loans are starting to show signs of stress and a growing proportion of the auto loan asset-based security market is now made up of “deep subprime” deals.


Yeah, that doesn’t bring back any housing crisis nightmares.

Oh and then there is this sticky little bit that paints a seriously less-than-rosy picture of household finances, the Sentier Research Median Household Income Index. The red line is the index and the black line is the unemployment rate. The index was set to 100 back in January 2000 and today is at a whopping 98.7. Yep, that’s a brutal seventeen years later and the median household is worse off, yet the talking heads keep telling us that things are going oh so great.

We’ve also talked here at Tematica about the lack of wage gains. Recall that just a few weeks ago we learned that,

From February 2016 to February 2017, real average hourly earnings decreased 0.3 percent, seasonally adjusted. The decrease in real average hourly earnings combined with no change in the average workweek resulted in a 0.4-percent decrease in real average weekly earnings over this period.

So over the past year real average weekly earnings have fallen and yet, consumer credit keeps growing. In the fourth quarter of 2016, consumer credit rose 6.5 percent on a year-over-year basis and averaged 6.2 percent year-over-year growth during 2016. Think about that for a second – falling wages but borrowing more. Does that sound like things are improving and does that really sound like a sustainable trend? Declining incomes coupled with rising credit doesn’t bode well for future buying trends.

Today we’ll get the latest on Consumer Confidence and the S&P/Case-Shiller home price index update. I’m sure the mainstream financial media will be clapping their hands over just how glorious it all is.

I’m going to go find myself a spot of sunshine and plot my next move with bonds.


Source: Plateau in US auto sales heightens risk for lenders: Moody’s

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

This morning the US Bureau of Economic Analysis published its take on Personal Income & Spending for December. We’re rather fond of this monthly report given the data contained within and the implications for several of our investment themes, including Cash-strapped Consumers as well as Affordable Luxury and the Rise & Fall of the Middle Class. 

So what did the December report show?

Personal Income rose 0.3 percent, far faster than in November, but still below the 0.4-0.5 percentage gains registered in September and October. We saw the same pattern with Disposable Income (which is a better barometer for discretionary spending), as one would expect to see during the holiday shopping laden month of December.

That’s as good a segue as any to remind our readers that holiday shopping during November and December came in stronger than the National Retail Federation had forecasted. The final tally was a year over year increase of 4.0 percent compared to the NRF’s 3.6 percent forecast.

Now you’re probably saying to yourself, “How can that be given all the bad news that we’ve been hearing from Macy’s (M), Target  (TGT), Kohl’s (KSS), Sears (SHLD) and other brick and mortar retailers?”

To be honest, we doubt the average person would have thrown in the “other brick and mortar retailers” part, but we know our readers are smarter than the average bear.

The answer to that question is that non-store sales, Commerce Department verbiage for e-tailers like Amazon (AMNZ), eBay (EBAY) and digital Direct to Consumer business like those found at Macy’s, Under Armour (UAA), Nike (NKE) and other retailers, rose 12.6 percent year over year to $122.9 billion. We certainly like those stats as they confirm several aspects of our Connected Society investing theme, but we would argue a more telling take on the data is that non-store sales accounted for 19 percent of holiday shopping in 2016, up from 17 percent the year before. Nearly one-in-five shopping dollars was spent through online or mobile shopping.

We’ll get a better sense of this shift, which we only see as accelerating, later this week when both United Parcel Service (UPS) and Amazon report their quarterly results for the December quarter. Team Tematica will also be listening to Direct to Consumer comments from Under Armour and other apparel and footwear companies as they too report quarterly results over the next few weeks.

Now let’s take a look at December Personal Spending – it rose 0.5 percent, a tick higher than was expected. Given the NRF data above, it was rather likely we were going to get a better print vs. expectations.

In combining both the income and spending data for the month, we get the savings rate, which fell to 5.4 percent, a five-month low. Compared to a few years ago, that savings level looks rather solid even though it’s well below the longer-term trend line. What we do find somewhat disconcerting, given the prospects for the Fed to boost interest rates up to three times this year after only doing so just two times in the last two years, is the amount of revolving consumer debt outstanding. As evidenced in the graph below, those levels have continued to climb steadily higher during 2015 and 2016.

Should interest rates move higher in 2017, the incremental interest expense could crimp consumer wallets, reducing their disposable income in the process. To us, that could mean less Affordable Luxury or even Guilty Pleasure spending as more become Cash-strapped Consumers.