U.S. retail sales data in July showed tempering consumer activity likely due to Delta variant concerns and the waning impact of stimulus on consumer wallets. These themes warrant monitoring as Q4 approaches and early commentary suggests modest impacts on consumer behavior from the Delta variant will be manageable. It’s no secret that we are likely past peak consumer optimism and credit metrics for most investment grade retailers, which were largely COVID beneficiaries. However, we don’t see recent concerns around retail sales to be a broad threat to most IG retail credit profiles, which have largely grown stronger during the pandemic.
Using the Q2 earnings season as a barometer, U.S. retailers posted solid quarters with improvements in brick-and-mortar traffic and “normalization” underway as the unique comps from last year’s lockdown period cycle through. Supply chain woes continue, but most scale players are mitigating these risks by procuring exclusive cargo capacity and planning for inventory receipts for the important Q4 shopping season. Category performance was in line with expectations with some year-over-year growth moderation in lockdown-popular categories across hard lines and home, and rebounds in reopening categories like apparel. Home improvement retailers reported more weekday trips and fewer weekend trips as consumers returned to other recreational activities and travel. Looking forward, with fluid return-to-office and school trends, the upcoming holiday shopping season will likely be unique versus years past despite an expected return to in-person shopping relative to last year.
Flush with cash and gaining market share in many cases, issuers in our universe have strong balance sheets with an ability to flex financial policy to be more shareholder friendly. Specifically, dividend increases and share repurchase programs are widespread across the industry, but within the context of current credit ratings and target credit metrics. Share buyback programs can be flexed up or down depending on current business and market conditions and we expect issuers to behave in a measured manner.
At the tail end of the earnings season for IG retail, Amazon was reportedly looking to open small, department store-like locations. “What’s old is new again” as the fight for wallet share of the healthy consumer intensifies. While we expect the changing consumer behavior and uncertainties in the operating environment to persist, we anticipate that IG retailers should continue to operate from a position of strength but think this is mostly priced in across the high-quality universe.