Theft Adds to Retail Woes, Housing Market Turbulence, Workplace Evolution Accelerates
Rising Theft Concerns Amid Market Optimism in Consumer Sector
The consumer discretionary sector is at two-month lows as commentary from retailers raised serious questions about the “strong consumer” narrative.
In Macy’s earnings call, executives noted that “the customer is coming under pressure because these are new realities that they have to continue to deal with as we get through the back half of this year and move into next year”. Macy’s has experienced an increased rate of delinquencies, the speed of which was “faster than planned”.
Delinquencies caused sales in the company's "other revenue" segment to plunge from $234 million a year earlier to $150 million in its most recent quarter. The company also noted that theft is becoming an “increasingly serious issue impacting many retailers” and that it was a large factor in why the company’s earnings missed estimates.
Dick’s Sporting Goods had a similar issue. The company’s stock fell 24% on Tuesday as the reported an EPS of $2.82, below the $3.81 estimate. The company noted that “Organized retail crime and theft in general is an increasingly serious issue impacting many retailers. Based on the results from our most recent physical inventory cycle, the impact of theft on our shrink was meaningful to both our Q2 results and our go forward expectations for the balance of the year”.
Dick’s now expects earnings of $11.33 to $12.13 per share for the year, compared with previously issued guidance of $12.90 to $13.80.
According to the NRF, retailers saw an average 26.5% increase in organized retail crime incidents in over the previous year. Retailers also reported an increase in violence and aggression associated with organized retail crime. In May, Target had warned that theft and organized retail crime was hurting profitability and could reduce profits by more than $500 million, on top of the $650 million in losses it incurred in 2022.
Despite these worrying trends, not all market participants are discouraged. BofA recently double-upgraded Consumer Discretionary to Overweight. And their thesis was quite convincing…
BofA pointed out that consumer discretionary stocks generally lags the broader market during hiking cycles as higher rates shift consumer preferences from consumption to saving. However, the sector tends to trough as rates peak.
Discretionary had the biggest top/bottom line beat so far this earnings season (+3%, +20% respectively). Though it’s worth noting that Amazon and Tesla make up 50% of Discretionary’s market cap and 20% of earnings.
Another interesting tidbit from BofA’s note was that real wage growth is positive again for the first time in 2 years and that discretionary has been the biggest beneficiary of real wage growth (high correlation).
Turbulence in the Housing Market as Homebuilders Thrive…
Sales of pre-owned homes in the US dropped to their lowest since the beginning of the year in July, due to limited inventory and increased borrowing costs. Sales plunged by over 18% compared to the previous year, which isn’t surprising as 30-year mortgage rates are sitting above 7%.
Although home listings increased to 1.11 million from the previous month, it's the lowest July inventory since 1999. This has no doubt helped push homebuilders to becoming one of the best sectors YTD.
However, the recent rise in mortgage rates doesn’t seem to be priced in quite yet. Future home sales have a positive correlation with changes in mortgage rates. And right now, it’s pointing toward even lower home sales.
There’s also a massive disconnect between homebuilder and homebuyer confidence. Homebuilders such as Toll Brothers have seen strong profits. To boost sales, “builders have passed along drops in lumber prices, reduced home sizes, reduced lot sizes, and bought down mortgage rates”. While builders have found ways to optimize costs and incentivize purchases, many buyers continue to remain cautious…
Evolution of the Post-Pandemic Workplace
According to a report by Australian workplace sensor provider XY Sense, more than a third of desks in offices around the world are unoccupied all week. Of those that are used, 29% are used for 3 hours or less a day, and just 14% are occupied for 5 or more hours. Overall, office utilization is at roughly 50% of pre-pandemic levels. Meanwhile, meeting rooms for two or three people are 90% full on average. Generally, 80% of total floor space is taken up by individual workstations, with just 20% left for collaborative space.
Research from Haworth, an office furniture maker, found that 85% of employees had their own workstations before Covid, but less than 50% do now. This finding resonates with CBRE’s research, which found that companies are increasingly optimizing their spaces for efficiency and employee effectiveness. 66% of companies surveyed by CBRE are transitioning from individual seat assignments to seat-sharing arrangements.
Only a quarter of surveyed companies are planning on retaining a 1-to-1 employee/seat ratio. As a result of this shift towards seat sharing and the regular blending of virtual and physical work environments, there's a heightened emphasis on videoconferencing and space-booking technologies.
As companies reoptimize their workspaces to more ‘open’ environments, the total amount of office space needed will evidently decrease. ~45% of large companies have stated that building “shared meeting space” is important while ~32% of large companies view “flexible office space options” as important. We’ve already seen companies like Google list more than 182,500 square feet across four buildings for sublease. Google's latest sublease listing would add to the roughly 1.4 million square feet it dumped in late May across several offices near its headquarters in Mountain View, California. It also paused progress on plans for a $1 billion 80-acre campus.
While doing some preliminary research on companies that could benefit from this trend, I came across Steelcase, a company that sells a wide variety of furniture and building products suited for both solo and group work. They offer everything from office chairs and desks to lighting and movable walls. Apart from furniture, they also provide services to help businesses use their space efficiently, offer consultation on workplace setup, and even help with leasing and managing furniture assets. Something potentially worth looking into…