Earnings this week show shoppers will spend money for value, favoring two retail stocks

A busy week of retail earnings revealed that American consumers are spending with value top of mind. It’s a trend that benefits two Club names well-positioned to sell the best inventory at competitive prices. Target (TGT), Walmart (WMT) and TJX Companies (TJX) reported very different second-quarter earnings results over the past few days that show cost-conscious consumers continue to spend on essentials and services but are more discerning on their discretionary purchases. Ultimately, as spending on services puts pressure on the dollars left to spend on discretionary goods, it’s more important than ever to have the right mix and offer shoppers value they can’t get anywhere else. That’s where Club holdings TJX and Costco (COST) shine. “We are in a period where people do not want to spend a lot of money on things and they want value,” Jim Cramer said Thursday during the Investing Club’s August Monthly Meeting . “The consumer wants to make every dollar go further than the old days, perhaps because they want the money to hit the road and see the world post-Covid,” he added. Consumer spending “remains elevated” to historic norms, said Matthew Shay CEO of the National Retail Federation in a CNBC interview Wednesday. People continue to spend in the experience economy on things like travel, leisure, hospitality, and dining, he noted. The rest of shoppers’ wallets is allocated toward “spending more on necessities and being much more deliberate on discretionary items,” he added. This is, in part, why retail sales for July came in better than expected, up 0.7% for the month. Shopping at clothing and clothing accessories stores increased by 1%. Elsewhere, sales at electronics and appliance stores dropped 1.3%. This disparity signals that certain discretionary goods categories are working while others are not. Retailers who have the right merchandise at the right price are likely to perform better than those who don’t. WMT YTD mountain Walmart YTD performance Walmart on Thursday delivered a strong second quarter with revenue up 5.7% year-over-year to a better-than-expected $161.63 billion. U.S. same-store sales, excluding fuel, rose 6.4%, albeit slower than last quarter’s 7.4% growth. In addition, the retailer beat estimates on earnings and raised guidance. “People across income cohorts come to us more frequently looking to save money on everyday needs,” said Walmart CEO Doug McMillon during the company’s earnings call. The strong results were driven by strength in Grocery sales in the high single digits on a percentage basis and Health & Wellness sales in the high teens. However, sales at Walmart’s General Merchandise category which represents discretionary goods, were softer in the negative low single digits. It’s important to consider the breakdown of this General Merchandise category to get a better sense of why it was pressured. It includes electronics, video games, apparel, and home. Here too, we see Walmart had the wrong mix of goods. After all, how many people are now looking to buy a TV? If you wanted one, chances are you splurged during the pandemic while we were all locked up in our homes. The retailer also reported weak performance across apparel and sporting goods sales, slightly offset by better performance in automotive and back-to-school categories. The apparel weakness could be the result of consumers pulling back on this category, or the result of consumers looking for a better value on name-brand items. We think it’s the latter — given the results at TJX, which owns the T.J. Maxx, Marshalls and HomeGoods chains. TGT YTD mountain Target YTD performance Target on Wednesday reported a second-quarter that reflected weak sales along with a slowdown in discretionary spending. While delivering a bottom-line beat, the retailer missed on revenue, with same-store sales declining a much more than expected 5.4%. Target also cut its full-year guidance on lower sales trends. Food & Beverage sales grew in the low single digits while discretionary categories including apparel, home and hardlines all saw comparable sales declines in the low double-digits to mid-teens during the second quarter. Results took a hit as Target shoppers allocated more discretionary dollars toward services like leisure and travel, leaving less money to spend on discretionary products the retailer sells. Target CEO Brian Cornell said on the earnings call that the Food & Beverage and Essentials categories “absorb a much higher portion of consumers’ budgets.” But he acknowledged, “Consumers are choosing to increase spending on services like leisure travel, entertainment and food away-from-home,” which the team believes is pressuring sales of discretionary goods. The company is planning for a decline in comparable sales for the remainder of the year. Why? It could be that consumers are pulling back on discretionary goods overall, but considering what we’re seeing elsewhere, we think it’s more likely that Target simply doesn’t have the right product mix. Increased spending on services may be pressuring spending on certain discretionary products — but if it were broad-based, then we would see more pressure in all goods sold at retailers. That’s not the case. TJX YTD mountain TJX Companies YTD performance TJX tells a different story. The off-price retailer had a strong second quarter driven by strong top-line growth, accelerated discretionary spending, robust customer traffic, and better margins. The Club name posted strong Q2 sales in its apparel, accessories, and its home divisions. Overall, the company delivered a 6% year-on-year increase in comparable sales. The company’s largest division, Marmaxx (Marshalls and T.J. Maxx combined) increased 8% while HomeGoods improved, posting a 4% comp sales increase, returning to positive comp sales growth during the quarter. TJX also raised its full-year guidance. CEO Ernie Herrman said in the earnings press release that he sees “excellent opportunities to grow sales and customer traffic, capture market share and drive profitability.” Why is TJX management seeing strength in apparel while Walmart’s team sees weakness? TJX has the right product mix and offers shoppers high-quality merchandise at the best value. TJX’s sales mix includes apparel, shoes and home furnishings — items that are in the discretionary goods category. But its focus is much more concentrated than what we see at Target or Walmart. Fortunately, it’s concentrated on what’s working. You may not need a new T.V. every year. But, a wardrobe refresh can come with the seasons, or maybe just the need for a new outfit for an upcoming vacation. TJX also has better merchandise because many of the big retailers need to get rid of their inventory, which creates the treasure-hunting experience for quality merchandise buying. Don’t forget, department stores liquidating inventory results in a phenomenal buying opportunity for TJX as management can scoop up the excess inventory at discount prices and pass the savings on to their customers. “The marketplace is loaded with outstanding buying opportunities and we are confident that we will continue to offer a terrific mix of brands and an outstanding assortment of gifts to our shoppers during the fall and holiday selling seasons,” management said during its earnings call. Ross Stores (ROSS), an off-price competitor of TJX, told a similar story — delivering second-quarter earnings and revenue beats and a guidance raise. Comparable sales in Q2 rose 5% year-over-year driven by higher foot traffic and the right assortment of merchandise. Cosmetics and accessories were the strongest categories while performance in home and shoes also came in above average. While the Ross results support the power of the off-price retailer in this environment, we believe TJX is the strongest operator in the category. “TJX is the star of the retail show,” Jim said Thursday. “For those who are not in TJX, you might want to buy some.” He added, “TJX is the best-run retailer on the lot. Best quarter of all the retailers.” COST YTD mountain Costco YTD performance Looking ahead, Costco is set to release its fiscal fourth-quarter earnings on Sept. 26. “You’re not going to see us trade Costco” ahead of the report, Jim said Thursday. However, Costco is unlike other retailers because it reports sales monthly, giving investors like us much more visibility into how the company is performing. The monthly sales trend has been positive since last quarter, which featured margin expansion . Costco’s U.S. comparable sales for July increased 4.5% year-over-year driven by strong traffic. That’s a nice acceleration from the 2% increase in the retail month of June, and the 1.7% increase in May. We view these results as favorable since strong traffic tends to be a good sign that the wholesale retailer continues to pull in shoppers. Costco buys its merchandise directly from manufacturers in high volume, which allows it to price its high-quality goods lower than competitors. These goods are separated into either Food & Sundries, Fresh Food, and Non-food categories. Costco members purchase these items in bulk, so there’s a high inventory turnover. In many cases, Costco sells inventory before it’s required to pay for it. Given the massive value-add Costco offers its members, we think it’s only a matter of time before the company decides to increase its membership fee. This would be one of two catalysts for the stock. The other would be a potential special dividend payment. Both of these possible actions are overdue when compared to similar moves in the past. (Jim Cramer’s Charitable Trust is long 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.

Customers wait in line to check out purchases at Costco store on June 28, 2023 in Teterboro, New Jersey. Costco is cracking down on membership card sharing at its stores.

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