Tariffs, Prime Day and Gas Prices: What's Moving Retail?

**SPEAKER_1** (0:00)
David Swartz, Senior Equity Analyst, Consumer Equity Research at Morningstar is with us. So I'll start with today's retail sales number.
Month over month, it looked disappointing. Year over year, still shows growth. What did you think of those numbers?

**David Swartz** (0:19)
Yeah, so it's definitely not a terrible report, because as you said, we are still above where we were last year, but it did appear that there was a slowdown in July from June. There may have been some specific reasons for that, including that Amazon moved its prime days this year into June, and a lot of other retailers followed. So a lot of others, to try to counteract, Amazon moved their own sales for the summer into June from July last year. Another benefit that might have been in June was the World Cup. That brought in a lot of tourists from other countries, many of whom shopped. It does appear that at the end of the World Cup, there was a boom, but then it faded pretty quickly as those tourists left. Also, there was a lot of domestic buying of sports equipment and apparel during the World Cup, it appears too.
Then we have other issues too, like gas prices, which have continued to be high.
There were new tariffs imposed in July, and so there were some negative things in July that may account for why the consumer spending appeared to drop off from June.

**SPEAKER_1** (1:29)
The World Cup, by the way, was half in June and half in July. So should we take the next retail sales print also with a grain of salt?

**David Swartz** (1:40)
You can never really say exactly why these things change from month to month. It's always important to remember that you have to put them in perspective, that there can be ups and downs in these numbers for a lot of different reasons, and it's very hard to know exactly which one is the driver. We should see perhaps more about what the consumer spending looks like when we get the August numbers. That will give us some more information on the back to school season. It appears based on some things that I've heard that the back to school spending may have started earlier this year that also could have affected some of the summer months.
But we'll see if that causes then a slow down in August and September versus past years. There was also some issues with retailers stocking up on inventory early, I think because of the tariffs that were coming in July, that could have forced them to have some sales perhaps during the summer to try to clear some of that inventory and that also could affect the rest of the year because it is difficult to forecast demand several months in advance for the back to school and the holiday seasons. So we could see a situation in which retailers have too much inventory, some products that are forced to discount.

**SPEAKER_1** (3:02)
Look, we heard from Tapestry, which week to date is down about 20 percent. We heard from on them with these on-cloud sneakers, that is down about 14 percent this week. But overall, the consumer spending in the US, you said while it's strong and it's generally held up, you have some concerns that it's slowing overall, even concerns with the buy now, pay later. I do want to get to some of the names that you like. So if you could respond quickly.

**David Swartz** (3:32)
Yeah, sure. So we have heard from some companies, including Under Armour, another one was Michael Kors and On, you mentioned too, that have said that in the last few weeks, it does appear that there was a downturn in consumer spending and they have noticed lower traffic in the stores. And so that could be a negative trend that we'll see throughout the fall. But again, you can't really tell by just a few weeks because they can go up and down. Some of the retailers that we're reporting later this month that I think are undervalued include Coles. Coles has been struggling for some time, but its same store sales have been improving and at least they're getting back to close to zero.
And I think Coles is actually quite undervalued. Another one is Gap. Gap last quarter announced some weakness at Old Navy. We'll have to see how that works out. But Gap reports later this month. And I actually think that Gap is undervalued right now. Another one I think is very undervalued is Lululemon. Lululemon is trading at only about 10 times earnings.
It's really out of favor right now because Lululemon's growth has slowed in the US. But, you know, Lululemon generally is a very strong retailer and brand and it has no debt, has a very strong balance sheet and has a new CEO coming in next month.