Shoppers Dip Toes Back Into Discretionary Spending – Analysis

Discretionary spending is inching back just in time for the holidays.

That’s one readout from analysts after spending data and quarterly results from Costco Wholesale this week showed shoppers still have an appetite to splurge on items beyond everyday groceries and essentials.

The data comes after retailers, analysts and economists had cautioned in recent weeks that waning pandemic savings, higher interest rates and even the resumption of federal student loan payments could dampen demand for discretionary goods.

Sales at electronics and appliance stores surged 12% year on year in November, according to the Commerce Department. That’s up from 1.5% in October after seven consecutive months of lower year-on-year sales.

Other discretionary categories showed an acceleration from the previous months. Furniture and home furnishings stores posted a 7.3% decline in November, compared with a 12% slide the previous month.

Sporting goods, hobby, book and music store sales, meanwhile, logged a 0.2% gain, but broke a three-month streak of declining year-on-year sales.

The numbers show consumers “dipped their toes back into more discretionary categories,” Wells Fargo analysts said in a research note.

Retail sales add to other signals that the economy is headed for a “soft landing,” with interest rates coming down without a recession. Federal Reserve Chair Jerome Powell suggested Wednesday that the Fed may pivot toward considering when to lower interest rates as inflation subsides. That commentary prompted stocks to rally.

“While rates run the show, today’s retail read also screens positive,” the Wells Fargo analysts said.

Costco on Thursday provided another sign of life in discretionary spending.

Finance chief Richard Galanti said on a call with analysts that sales of appliances rose more than 20% online in the quarter ended Nov. 26, while television sales increased in the high-single-digits.

The retailer said it’s seeing improvements across all non-food categories, a sharp turnaround from the previous quarter. Galanti said in September that Costco’s average transaction took a hit in the period ended Sept. 3 due to weakness in bigger-ticket non-food items.

D.A. Davidson analyst Michael Baker said lower food inflation may be allowing Costco shoppers to spend more on non-essential items. Costco saw prices as flat to up 1% in the quarter, compared with a 1% to 2% rise in the previous quarter and 3% to 4% inflation in the period before that.

“This is a good sign for all of retail,” Baker said in a research note.

Bigger-ticket discretionary items make up a larger portion of Costco’s online sales, and the improved demand carried through into online results. Costco’s e-commerce sales rose 6.3% in the first quarter, compared with a 0.8% slide in the previous period.

Costco’s shoppers tend to have higher incomes due to its membership model, and not all companies are flashing positive signals.

Apparel company Roots and outdoor specialty retailer Sportsman’s Warehouse both warned this week that weaker discretionary spending was still pressuring their sales.

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