Silver banana goes to…

In this issue of the peel:

• Retail sales and earnings from Amazon and Walmart paint a rosy picture of American consumers. But, looking under the hood, clear signs of struggle are starting to emerge… like more frequent shopping at Walmart.

• Warren Buffett has a new favorite child, while Deere & Co’s earnings were abysmal, sending shares higher. B. Riley continued its Boeing-plane-level nosedive, and retailer Dillard’s is feeling the pain.

• Mortgage applications storm higher as rates matched their highest level in the last year.

Market Snapshot

Banana Bits

• ISM Manufacturing wasn’t as bad as it looked if we exclude autos.

• Taking a break from writing essays on X, Bill Ackman’s Pershing Square just revealed new stakes in Nike and Brookfield Asset Management.

• Average S&P 500 short interest just hit its annual high.

• Not all Chinese retailers were made equal in Q2 as JD.com rises after earnings, but Alibaba remains flat.

• VP Harris drops a few teasers on her economic plan to get released today.

The Daily Poll

Previous Poll:

Which stock will perform better over the next 12 months?

Chipotle: 26.3% // Starbucks: 34.6% // Short them both: 39.1%

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Macro Monkey Says

Sector Spotlight: Retail 

Shoutout to everyone who’s made a donation to the economy in recent weeks.

Your generosity paid off, at least according to yesterday’s Retail Sales report and the quarterly numbers recently released by the world’s largest retailers, Walmart and Amazon.

Alongside dominating the Paris Olympics and spreading its influence globally, this has to be confirmation that the American Dream is alive and well.

Let’s get into it.

The Numbers

Retail Sales: Yesterday, the U.S. Census Bureau released its Advance Monthly Sales For Retail and Food Services report for July.

According to their data, spending is as strong as the presidential race, which is heated.

Total retail spending increased by 1.0% in July, beating estimates and rebounding from the 0.2% decline reported the previous month. Annually, sales grew by a healthy 2.7%.

As we can see above, most of the increased spending comes from car sales. The auto industry has already seen quite the uptick in activity, along with mortgages, thanks to looming rate cuts.

Nonstore retailers, a.k.a. Amazon… (spoiler alert), led the way, increasing 6.7% from July 2023. But daddy Bezos wasn’t the only one putting the team on his back.

Americans are still getting drunk and fat at record levels. Spending on food services and drinking places grew by 3.4% from last year. I’ve never been so proud of my country.

Amazon.com: Speaking of strong nonstore retailers, Amazon’s Q2 earnings report—released Aug 1st—looked strong on the retail side.

Shares sold off that day, mostly thanks to weak guidance and underwhelming advertising revenue. But, for today’s purposes, the retail unit is all we care about.

As we can see, Amazon’s North American retail segment continued taking steroids, with revenue up 9% annually to $90bn. For the 6 months ended June 30th, North American retail sales grew 11% vs 2023. 

Sales for the first half of the year grew at the same rate as in 2023, but the 9% growth in Q2 slowed down from 11% in Q2’23. 

Operating income, however, ballooned even faster than Bezos’ wallet, growing 57% from Q2 of last year and implying that sellers on Amazon were still able to pass on cumulatively inflated prices and that cost pressures at the corporate level reduced. 

Plus, not to mention that 2024’s Prime Day hit a record $14.2bn in sales, growing…  11%...  from this national holiday in 2023.

Walmart: Also on Thursday, the only retailer in the world that pulls more than Amazon delivered a jacked-up earnings report that got champagne bottles popping on Wall Street.

Shares in this behemoth rose 6.58% after reporting a beat on sales and earnings, delivering $0.67/sh on $169.34bn in sales vs the $0.65/sh on $16863bn expected. 

Total revenues grew 4.8%, while U.S.-based same-store sales increased 4.2%. 

Feeling confident in consumers, Walmart increased full-year revenue guidance from 3-4% growth to 3.75-4.75%. However, the retailer at the same time issued sobering earnings guidance, saying the second-half may not be as strong as the first.

CFO John Railey used ExecSpeak, saying, “In this environment, it’s responsible or prudent to be a little bit guarded with the outlook, but we’re not projecting a recession.” In other words, “we could be f*cked, but we don’t think so as of right now.”

But, he then went on to add that “we don’t see any additional fraying of consumer health,” pointing to the fact that sales for general merchandise grew for the first time in 11 quarters.

Sales from Walmart’s discount store (think about that again—the discount store for Walmart) posted solid performance as well, with same-store sales at Sam’s Club up 4.6% in total and 5.2% excluding gas and diesel sales.

While that sounds great, this could have contributed to the 42.3% decline in net income, falling to $4.5bn last quarter. 

Although the top-line is strong, the fact that “... [Walmart’s] members and customers that they remain choiceful, discerning, value-seeking, focusing on things like essentials rather than discretionary items.” could be a sign of consumer weakness to come.

However, Walmart's online retail segment grew 22% while its advertising unit led the way up 26%.

The Takeaway?

Consumers spending is walking a tightrope… and it just lost its balancing rod.

Sure, spending could still make it to the other side, but they’re starting to get wobbly.

Based on the above data, the key facts to remember include:

• Consumer spending is holding up well, especially via e-commerce.

• Consumers are becoming more and more deal-seeking and value-oriented.

• Discretionary spending is faltering.

• Spending on credit-linked items is increasing.

So, basically, this means that consumers are fine for now, but it seems that we’re likely entering a period of protracted spending. 

Because of the strength in spending in the post-pandemic environment, this could still just be a normalization rather than a sign of a recession on the horizon.

Or, as BofA put it, “... for now, Bank of America internal data on after-tax wages and salaries growth remains supportive of consumer spending” despite reporting the above 0.4% decline in card spending last month.

Fingers crossed.

What's Ripe

Ulta Beauty (ULTA) 11.17%

• Uh-oh, is the teenage girl recession over? We might be headed in that direction after yesterday’s gain; I just never expected a 93-year-old man to be the savior. 

• Warren Buffett officially saved the day by disclosing recently added positions in make-up provider Ulta Beauty, partly answering the firm’s cash question.

• Buffett and Berkshire also bought shares in electronics maker Heico. The young buck still owns more T-Bills than JPow, so we’ll see if more purchases follow.

Deere & Co. (DE) 6.35%

• I’ve seen better outcomes at a funeral than Deere’s second-quarter earnings. But, unlike most funerals (hopefully), it’s all smiles… for now.

• The agricultural equipment company reported net sales and earnings above estimates, but that was only because estimates were so damn low.

• Sales decreased across all three segments and guidance for each call for declines of at least 10% and up to 25% across the board. 

What's Rotten

B Riley Financial (RILY) 27.69%

• Like showing up late to a party, B Riley was left out of all the fun on Thursday. Delayed and sure-to-be terrible earnings are weighing.

• Shares are down almost 90% YTD. A portfolio of bad loans and other securities is triggering write-downs, causing huge losses and liquidity concerns.

• Goodwill alone has been marked down over 80% as part of a nearly 50% loss in total asset value. Nobody needs a rate cut more than these guys.

Dillard’s (DDS) 10.73%

• Tell us how you really feel, William Dillard. The CEO of his eponymous company made us fire up the world’s smallest violin in response to Q2 earnings. 

• “We are disappointed with our weak performance in the second quarter,” he said, as sales fell 5% to $1.489bn while net income fell 42.5% to $4.59/sh.

• Both missed estimates. Margins decreased, and discount-seeking customers and lower traffic signaled weakness in discretionary spending.

Thought Banana

More-tgages

What a bunch of losers.

Suddenly, just a few weeks after I got my rate, everyone started applying for new mortgages. Idiots—don’t they know I already have a high score?

What Happened?

Mortgage applications in the U.S. were similar to that bubble SpongeBob, and Patrick blew when they were painting Mr. Krabs’ house, just waiting to pop.

The average 30-year fixed rate sits at its lowest level in at least a year, currently at 6.49%, according to Freddie Mac.

Refinancing applications led the way, skyrocketing 117% from last year and 34.5% from just a week ago.

Mortgage purchases, which measure applications for new homes, grew by just 2.8%. However, the fact that they are growing at all is still a strong sign for the housing market, which likely reflects the industry's weakness in recent years.

According to Fannie Mae, 90% of homeowners with a mortgage carry a rate below 6%, and 81% brag to their friends about having a sub-5% rate.

Those misfortune enough to have bought a house after March 2022 are making up the bulk of refinancing requests for obvious reasons. But, as rates continue to fall, expect the limitless demand from Millennials and Gen Z to keep lenders busy.

According to our recent poll, the vast majority of you anticipate buying a home in the next decade. If you apes are a good national representation, the industry’s bull market could have equally long legs.

The Big Question: What stocks would be the biggest beneficiaries in a housing boom? What is wrong with the 5 of you that said you’re renting forever?

Banana Brain Teaser

Previous

A rope of 20.6 meters long is cut into two pieces. If the length of one piece of rope is 2.8 meters shorter than the length of the other, what is the length, in meters, of the longer piece of rope?

Answer: 11.7 meters

Today

When a subscription to a new magazine was purchased for m months, the publisher offered a discount of 75% off the regular monthly price of the magazine. If the total value of the discount was equivalent to buying the magazine at its regular monthly price for 27 months, what was the value of m?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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