Rising Inventory Levels Are a Warning Sign for Select Retailers

*Rising inventory levels could be a sign of coming margin pressure at select retailers

*We continue to think consumers pulled forward shopping into July due to Amazon, Walmart and other shopping events

*Data from VantageScore shows slower credit growth and rising early-stage consumer credit

*We continue to favor Costco shares, but we’re keeping our eyes open for Mastercard shares — here’s why

In sifting through some of the retailers that have reported this week, including Kohl’s KSS and Abercrombie & Fitch ANF, we’re seeing a potential harbinger of tougher margin times ahead. We’re talking about increasing inventory levels. Because these companies are reporting July quarter results, the argument could be made that their inventories were being built ahead of the back-to-school shopping season. Certainly plausible, and we’ll get some clarity about that likelihood when we get the August Retail Sales report in a few weeks.

Should the data in that report support the notion that consumers pulled forward spending during July shopping events, that could mean Kohl’s, Abercrombie and others may resort to larger discounts to make room for the holiday shopping season.

Amazon’s AMZN 2024 Prime Day haul of more than $14 billion set a record, and other reports find the level of participation in Walmart’s WMT Walmart+ Week surged. While a smaller event, Walmart shoppers spent on average $473 during the event, which is about 45% more than the $326 spent by Amazon Prime Day shoppers.

As you digest those figures, one of the factors that helps explain Walmart’s lead was that 67% of Walmart+ Week participants bought groceries, a testament to Walmart’s being the largest U.S. grocer. But we’ll take it, as it bodes well for Costco COST and its presence in fresh foods. Much the way Walmart leverages groceries to sell other items, so too does Costco. And we continue to love the membership business model, especially as it will get a boost come September with the membership price hike.

We’re also seeing other signs consumers are tightening their belts. In its July 2024 CreditGauge report, VantageScore, a leading national credit-scoring company, found both consumers and lenders shifted to a more cautious credit posture. Per the New York Fed’s 2Q 2024 Household Debt and Credit Report, aggregate consumer credit card debt rose $27 billion during the June quarter to $1.14 trillion. VantageScore’s July finding also showed that early-stage consumer credit delinquencies (30 to 59 days past due) rose the most in more than four years as the weaker employment environment negatively impacted consumer payments on recent loans. This supports the commentary we’ve heard over the last few weeks about consumers being selective and retailers issuing cautious guidance.

We’ll have our eyes on wage growth data, especially that for real wage growth, with Friday’s July Personal Income & Spending report as well as the upcoming August Employment Report. Should we see increasing signs that consumers are pulling back in their overall spending and available firepower, as in disposable income, is waning, it would be a headwind not only for the economy but also for our shares of Mastercard MA. Mastercard shares have been nicely from $430 to around $470 over the last month, a nice 10% move that has them less than 5% away from our $490 price target.

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At the time of publication, TheStreet Pro Portfolio was long AMZN, COST and MA.