According to insights shared by Truist Securities, consumer spending has shown signs of fading as we progressed through the second quarter of the year. Shoppers, however, continue to engage in selective purchasing driven predominantly by value and the promise of innovative products. Notably, the card data analyzed by the brokerage, alongside the latest quarterly earnings reports that have been made available, indicate that while sales are starting to soften on the margins, consumers remain open to spending.
This perspective has been articulated by a dedicated group of analysts at Truist, including Scot Ciccarelli, who emphasized these observations in a detailed note. In the retail space, companies such as Home Depot and Lowe's, both identified as strong buy opportunities by Truist, have shifted their full-year outlooks slightly downward.
On the contrary, Walmart has projected a mild increase in their guidance, while Target has celebrated its first positive comparable sales in a span of five quarters against relatively easy historical comparisons. These trends suggest that consumers are increasingly prioritizing purchases that either emphasize value or highlight innovation. Given the prevailing purchasing trends, Truist has advised investment in what they characterize as 'defensive growth' companies.
Among these are O'Reilly Automotive and Autozone, both rated as buys, alongside 'deep value providers' like Costco and Ollie's Bargain Outlet, which also hold buy ratings. It's worth noting that Walmart is currently rated as a hold in this evolving narrative. Truist holds expectations for in-line sales performance for companies rated as holds, including Best Buy and Five Below.
Moreover, there might be 'modest upside potential' for Ollie's Bargain Outlet relative to expectations laid out in their models. Best Buy, in particular, is observed to be in a 'bottoming process' as it copes with over two years of declining comparable sales. Analysts have attributed this to a surge in artificial intelligence technologies that are propelling an innovation-driven upgrade cycle, especially in laptops and mobile phones, according to the analysis forwarded in the report. On the other hand, the wrap-up of the second quarter did not conclude positively for Five Below.
Analysts observed a weak exit from Q2, coupled with what seems to be an even softer beginning to the third quarter, presenting potential challenges to Five Below’s top-line performance. Conversely, Ollie's Bargain Outlet stands out as possibly one of the few entities within Truist's portfolio capable of exceeding sales expectations, although its performance is currently being tracked below earlier mid-quarter estimates referenced in the note. Further insights revealed a reduction in estimates on Dollar General, currently rated as hold, that resulted in a price target adjustment from $135 to $130.
Truist’s revision of their second-quarter comparable sales growth estimate for Dollar General was notably drastic—being more than halved from 2.2% to just 1%. Additionally, the projection for earnings per share has also been recalibrated downward from $1.88 to $1.76. As we look towards the landscape of financial markets, analysts universally anticipate that the Federal Reserve will embark on a journey of reducing interest rates in the month of September.
A more pronounced rate-cutting initiative, which Truist is increasingly regarding as a likely scenario in light of ongoing macroeconomic challenges, could outsizedly favor cyclical names like Home Depot, Lowe's, and Best Buy, amidst the shifting economic tides..