The End of Shein?

Few companies are as loved and hated by consumers at the same time as Shein and Temu. But, new legislation proposed by the White House threatens their business model. Find out more below.

September 16, 2024

Silver banana goes to…

In this issue of the peel:

  • Consumer spending can’t make up its mind. A monthly decline and an annual increase paint a mixed picture of what to expect from consumers in the face of coming U.S. interest rate cuts. In other words, the U.S. economy needs more donations.

  • Strong numbers from RH bring hope to the stock and the housing market while Uber and Waymo’s romance grows deeper. Adobe can’t tell if AI is a good or a bad thing for them, and the Boeing situation somehow got worse.

  • Few companies are as loved and hated by consumers at the same time as Shein and Temu. But, new legislation proposed by the White House threatens their business model. Find out more below.

Market Snapshot

Banana Bits

Welcome to the halftime show.

As we entered the third quarter of 2024, it was a good time to check the barometer for signs of what’s on the M&A horizon.

Will deal volume be up or down, and what will the drivers be? What about deal size? How is the U.S. presidential election going to influence things?

SRS Acquiom turned to more than 160 investment bankers and other M&A professionals to find out what they think—and compiled the resulting data into a quick reference guide.

Want to wow your MD with your knowledge of the M&A terrain? That might be a stretch, but you’ll definitely improve your chances if you download the Mid-Year M&A Outlook now.

Macro Monkey Says

Checking In On Checking (Accounts)

Along with peer organizations like the Wall Street Journal or the New York Times, we media titans do a lot of yappin’ about inflation, unemployment, interest rates, etc.

But quite honestly—who cares?

In the U.S. economy, all this usual nonsense leads back to the one factor that truly matters—consumer spending.

Let’s get into it.

What Happened?

America’s true national pastime, we have a real talent for throwing money around like it’s a football on Sunday. 

Lately, our spending has been like Michael Jordan on the Wizards—still the GOAT, but our talent’s clearly running out.

In August, total spending across credit and debit cards increased by 0.9% annually among BofA account holders. 

That’s a welcome change from the 0.4% decline in July. However, on a monthly basis, we’re still spending like Dave Ramsey’s looking over our shoulders.

Spending in August declined 0.2% from July after a 0.3% rise.

Because we’re still dealing with the impact of artificially inflated spending numbers lingering from the impacts of the pandemic, it’s difficult to say with any degree of confidence whether this is a “normalization” or a straight-up “weakening.”

With that said, our take is that it’s both.

In order for spending to “normalize,” it has to weaken compared to recent years. They’re one and the same, but consumer finances give reason to be constructive.

As we can see above, wage gains are increasing again across all income spectrums led by lower-wage earners. Because low-wage earners have a higher propensity to spend, that’s ideal for upholding healthy consumer spending growth.

Plus, savings balances broadly remain elevated, sitting “more than 33% above” levels observed before the pandemic in 2019.

Banking on wage gains and increased savings (no pun intended), the recent 6% jump in total consumer credit balances appears less of a risk than you might assume.

Our fellow media titans have also been tweaking in recent weeks over rising delinquency rates alongside credit balance growth, but at 3.25%, we’re still well within historical bounds.

So, the immediate question becomes—how the f*ck is that possible?

With a weakening labor market, it’s surprising to see consumer finances broadly improving on an annual basis. According to Bank of America, a more relaxed housing market is helping.

Growth in the cost of not being homeless has slowed substantially, giving consumers a lot more wiggle room in how to waste their money.

These declines come even before rate cuts actually come into effect next week, so it appears these trends are locked in, at least for the near term.

The greatest concern BofA found lies within auto payments.

Loan repayment costs are increasing, but as a percentage of income, they’ve actually declined since 2021. This could result from declined new car purchases, but we’ll let the retail sales report dropping Tuesday tell us if that’s the case.

The Takeaway?

It’s true that America runs on Dunkin’, just not only Dunkin’.

Whenever someone tells you buying coffee or anything else is a “waste of money,” just realize they’re actually thanking you for your selflessness in donating to the economy.

Donations may have slowed on a monthly basis in August, but given the strong annual increase and broadly improving financing driven by wage gains and a high savings rate, there’s little reason for major concern… for now.

What's Ripe

RH Inc (RH) 25.49%

  • Congratulations to you all on being here when we discovered unicorns are real. RH shares just surged despite lower guidance for the full fiscal year.

  • The home furnishing maker delivered $1.69/sh on $830mn in sales vs estimates for $1.51/sh on $824.5mn. Several analysts raised their price targets.

  • But RH lowered this year’s revenue growth estimates from 8-10% to 5-7%. Last quarter’s strength was interpreted as a rebound in the housing market, adding to the firm’s valuation.

Uber (UBER) 6.45%

  • Cereal & milk, chocolate & peanut butter, and now, Uber & Waymo. The romance between these two has been budding for some time and is now officially official.

  • Waymo, Google-parent Alphabet’s self-driving unit, alongside Uber, announced plans to launch their self-driving rideshare partnership in two more cities.

  • The two have long worked together in Phoenix but now will take their talents to Austin and Atlanta as well. Uber shareholders are hyped as this is seen as a defense against Tesla’s robotaxi unit.

What's Rotten

Adobe (ADBE) 8.47%

  • I still can’t tell if AI is this company's Grim Reaper or the Holy Grail. But on Friday, it was clear the market only saw the grim side of Adobe.

  • Sales grew 10.6% annually to $5.41bn, beating estimates for $5.37bn. The firm’s largest segment, Adobe Digital Media, led the way, growing 11% to >$4bn.

  • But like curiosity, guidance killed the cat. Adobe now projects revenue of $5.5-$5.55bn next quarter, while the market was looking for $5.6bn. It seems like this $50mn miss led to a market share loss of >$22bn.

Boeing (BA) 3.69%

  • It’s hard to believe that passengers on Boeing’s deathtraps, I mean air and spacecraft, weren’t the first to boycott this company. Employees beat ‘em to it.

  • Boeing’s largest union went on strike last week as machinists working on models like the 737, 767, and 777 rejected the company’s proposed pay package.

  • If these are the guys that can’t install a door correctly, this is a huge win for us all, unless your name is Kelly Ortbeg. As the new CEO, he’s got his hands full.

Thought Banana

The End of Ultra Fast Fashion?

Even the weeds in my backyard don’t grow nearly as fast as Shein and Temu have in the U.S. in recent years.

But, that growth—and (hopefully) the child labor that inevitably came with it—may now be on its deathbed.

Let’s dive in.

What Happened?

So much for “lowering the cost of living.” 

Wildly popular Chinese retail giants Shein and Temu burst onto the scene by pushing ultra-cheap, ultra-fast fashion and other goods to U.S. consumers.

Ad blitzes and extreme discounts ensured their offerings couldn’t be ignored. But now, a key piece of U.S. regulation that allowed their business models to flourish may cause them to break faster than most of the sh*t bought on their websites.

Most companies ship products from China to the U.S. in bulk. However, Shein and Temu have pursued a “direct-to-consumer-shipment” strategy that allows much faster shipment, increasing volume with some sacrifice on unit economics.

Right now, products shipped from overseas can avoid the costly, prolonged process of going through U.S. customs when the total value of those products is under $800, but not under Joey B’s watch. 

On Friday, the White House released this proposal to close the so-called “de minimis” exemption.

So, a large factor allowing Shein and Temu to get your sh*t to you faster than you can click “complete order” is about to get closed.

Total shipments from China to the U.S. falling under this exemption reached 1bn packages in 2023, a nearly 10x increase since 2014.

The Takeaway?

Shein and Temu claim they’re not scared, but that’s hard to believe. 

At the very least, this revocation of an exemption will come with increased costs for these companies. Whether that’s eaten by consumers or the companies themselves is yet to be seen, but it’s clear someone’s f*cked.

The White House says the idea is to “protect” domestic competitors and more effectively monetize tariffs.

Maybe if Joe saw how cheap he could get these drippy *ss clothes, he wouldn’t be so mad.

The Big Question: Can Shein and Temu adapt their business models to survive increased shipping costs and tighter regulations in the U.S.?

Banana Brain Teaser

Previous

Company C produces toy trucks at a cost of $5.00 each for the first 100 trucks and $3.50 for each additional truck. If 500 toy trucks were produced by Company C and sold for $10.00 each, what was Company C’s profit?

Answer: $3,100

Today

A couple decides to have 4 children. If they succeed in having 4 children, and each child is equally likely to be a boy or a girl, what is the probability that they will have exactly 2 girls and 2 boys?

Send your guesses to [email protected]

❝

You must gain control over your money or the lack of it will forever control you.

Dave Ramsey

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Happy Investing,
David, Vyom, Ankit & Patrick