Americans Surprise Wall Street With Spending Boom During Coronavirus

(Bloomberg) -- The American consumer is proving more resilient than predicted.

Conventional wisdom, which initially assumed many U.S. shoppers would save their paychecks and stimulus funds until the pandemic subsided, has proved unfounded. The largest American retailers all reported sales in the latest quarter that blew away expectations.

From Wall Street to the retailers themselves to the manufacturers that supply them, it seemed no one was ready for just how brisk demand would be from a consumer base stuck inside with nowhere to go.

Home-improvement chains Home Depot Inc. and Lowe’s Cos., everything stores Walmart Inc. and Target Corp., and of course online behemoth Amazon.com Inc. each beat analysts’ sales forecasts in the summer quarter -- and by billions of dollars apiece. Companies that have been able to pivot quickly to more online sales or already had established apps for curbside pickup have done particularly well, plus those that cater to a bored American shopper looking to spend.

The “fatal flaw” of economists was assuming that people will always keep their wallets closed during tough times, leading to miscalculations about consumer demand, said Doug Stephens, founder of Retail Prophet.

The recent spate of robust retail earnings have shown the power of consumer resiliency and adaptability. They also reinforce the staggering unpredictability of pandemic times.

Going forward, this past quarter raises doubts about how seriously to take anyone claiming to have a read on America’s shopping habits, especially as Congress remains stalemated over additional stimulus and millions still out of work.

Big Six

Craig Johnson, president of Customer Growth Partners, says the “big six” retailers seeing record growth -- Walmart, Amazon, Home Depot, Target, Lowe’s, and Costco Wholesale Corp, which hasn’t yet reported -- all share some common traits. They have consistent traffic growth, rising store productivity, improved online platforms, a mix of discretionary and non-discretionary items and a clear understanding of their customers’ needs and preferences.

“On a dollar basis, households are sitting on $3.4 trillion in savings, up $2.2 trillion from last June, indicating that consumers still have a lot of dry powder waiting to spend,” he said in an email. “Retail sales are also bolstered by the steep decline in spending on travel, entertainment and restaurants.”

Lowe’s Chief Executive Officer Marvin Ellison has certainly witnessed that trend. As his company reported same-store sales in the U.S. at a blistering 35.1% rate, he says he’s seeing a behavior change in consumers.

“It’s a shift away from vacations, it’s a shift away from dining out. It’s a shift away from apparel purchases. It’s those dollars that you may have invested in those things that now you’re spending on your home and in some cases out of necessity like trying to create a more functional environment,” he said in an interview.

The government’s retail sales data underscore this adjustment. Sales at non-store retailers, building materials outlets and auto dealers account for greater shares of total retail purchases than they did in February, before the pandemic, while restaurants and clothing merchants represent less.

Ellison’s even changing how he views his own home space. His daughter is an incoming college freshman, whose first few weeks of college will consist of remote learning, so Ellison had to set up a makeshift classroom so she can work productively.

“Are we also seeing discretionary spend? Sure. We are also seeing people get new furniture, upgraded appliances and we’re seeing other things like new kitchens, new bathrooms,” he said. “What was catching everyone by surprise was that all of us were spending more time at home than we ever have in our lives. We’re simply finding more things to do to make our homes more functional.”

Another potential sign that consumer spending fared better than most feared: Even small businesses have been surprisingly resilient so far, avoiding the surge in permanent closings that many expected at the start of the Covid-19 crisis.

Industry Losers

Those retailers who haven’t fared as well are the ones closely linked to the American shopping mall, especially department stores and retailers focused on apparel. TJX Cos., the owner of the T.J. Maxx and Marshalls chains, fell the most in more than four months Wednesday after predicting that sales at opened stores will drop as much as 20% in the current quarter, while Kohl’s Corp. on Tuesday plummeted as it became clear the business struggled to regain sales as shoppers stay home or flock to e-commerce.

The question is whether these elevated sales last after federal stimulus checks come to an end. A consumer survey from analysts at Stifel found that three out of four Americans have already spent a chunk of their stimulus checks, and Walmart warned this week the effect was already apparent. Target CEO Brian Cornell said he hopes there is a second round of federal stimulus to put more money in consumers’ pockets.

“The ending of enhanced benefits is undoubtedly a negative as it will deprive many households of the extra cash they were spending on the home,” Neil Saunders, Managing Director of GlobalData Retail, said in an email. “However, from our data it is still clear that home remains a big priority for most consumers and spending cuts are more likely to be focused on categories such as apparel. It is also true that by spending less on things like travel, gasoline, and eating out,” households have more money banked for other outlays, like improving their homes.

“Analysis of the pandemic usually involves talking about retail casualties,” he added. “However, as these results show, the crisis has created success as well as failures.”

©2020 Bloomberg L.P.