Trade War Be Damned, the American Consumer Is King

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August 21, 2019

The American consumer is resilient, even in the face of broader worries over trade, interest rates, geopolitical tensions and a global economic slowdown that is looking increasingly like the precursor to a looming recession.

That's the takeaway from a pair of earnings released before the bell Wednesday from Target ($TGT) and Lowe's ($LOW). Both big-box retailers reported better-than-expected quarters, and taken together, helped paint a picture of a consumer economy still firing on all cylinders even as some retailers struggle to define their business model in an era of e-commerce.

Target and Lowe's joined Walmart ($WMT) in establishing a trifecta of surprisingly strong growth for retail giants that still do most of their business in brick-and-mortar stores. Same-store sales, the all-important metric for the sector, rose 3.4 percent and 2.3 percent for Target and Lowe's, respectively. Target shares rocketed higher by 18 percent ー the stock's biggest percent gain since October 2008 ー trading at an all-time high as of midday Wednesday. Lowe's shares were up 10 percent.

The two retailers, alike in some ways, offer different stories about the U.S. consumer, according to Ken Leon, global director of industry and equity research at CFRA. He told Cheddar that the Target beat shows that the company "has found the right formula for its stores, and we're seeing those results."

Target has been pouring money into new innovations, like BOPIS (Buy Online, Pick up In Store), that leverage its existing real estate and are proving to be attractive to customers who don't want to brave checkout lines or wait for delivery. Target is also experimenting with speedier shipping to better compete with Walmart and Amazon ($AMZN). The company known for its fashion and furnishing labels also just announced its largest private-label launch ever with its Good & Gather grocery line (though that would not have impacted the most recent quarter).

For Lowe's, "it's a turnaround story," said Leon. The home-improvement space has suffered more than other segments of retail because of jitters that tariffs could start significantly denting sales. Home Depot ($HD) mentioned as much in its latest mixed earnings report, though it also beat sales estimates in Q2.

Leon pointed to the fact that ー trade war or no trade war ー wages are rising, albeit slowly, unemployment is low, and Americans are staying put for longer.

"Those staying in their homes are going to spend more to fix a kitchen or a bathroom," he said.