Decoding the Impact of the $15 Special Dividend on COST Stock

Costco Wholesale Corporation (COST), a leading membership-based warehouse retailer, last week announced that its Board of Directors declared a special cash dividend on common stock of $15 per share, payable January 12, 2024, to shareholders of record as of the close of business on December 28, 2023. The aggregate amount of the payment will be nearly $6.70 billion.

This marks the fifth special dividend to be paid by Costco in the last 11 years and its largest so far. The special dividends paid previously were in 2012, 2015, 2017, and 2020 in the amounts of $7, $5, $7, and $10, respectively.

COST has shown significant resilience even as other big-box retailers raised caution on the consumer outlook. The recent news of Costco’s special dividend builds on its stellar financial performance in the first quarter of fiscal year 2024.

In addition to the special dividend, the warehouse club chain pays a regular annual dividend of $4.08, translating to a yield of 0.62% at the current share price. Its four-year average dividend yield is 1.36%. Moreover, COST’s dividend payouts have increased at a CAGR of 12.9% over the past three years. Costco has raised its dividends for 19 consecutive years.

After the retailer topped analysts’ estimates in the last reported quarter and announced a $15/share special dividend, shares of COST have been moving up the charts lately. The stock has surged nearly 14% over the past month and more than 28% over the past six months.

Robust Last Reported Financials

For the fiscal 2024 first quarter ended on November 26, 2023, COST reported revenue of $57.80 billion, slightly surpassing analysts’ estimate of $57.79 billion. This compared to the revenue of $53.44 billion in the same quarter of 2022. Its same-store sales grew 3.8% from a year ago. Also, e-commerce sales rose 6.3%, driven by solid demand during the Black Friday weekend.

The company said its sales got a significant boost during the recent Thanksgiving weekend when it sold more than four million pies. Also, COST made $100 million from the sale of gold bars during the quarter.

Costco added nearly 72 million paid household members in the first quarter, an increase of 7.6% compared to the same period last year. Shopping frequency at its stores grew 4.7% worldwide and 3.6% in the U.S.

The retailer’s operating income rose 13.3% year-over-year to $1.98 billion. Its income before income taxes was $2.11 billion, an increase of 19% from the prior year’s quarter. Also, its net income grew 16.5% year-over-year to $1.59 billion. The company posted a net income per share of $3.58, compared to the consensus estimate of $3.42, and up 16.6% year-over-year.

COST’s cash inflows from operating activities were $4.65 billion, up 78.2% from the previous year’s period. As of November 26, 2023, Costco’s cash and cash equivalents totaled $17.01 billion, compared to $13.70 billion as of September 3, 2022.

Improved Discretionary Spending During the Holiday Season

Costco got a solid start to its new fiscal year 2024, as consumer demand for discretionary items surged at the beginning of the holiday season. 

According to the National Retail Federation (NRF) forecast, holiday spending is anticipated to reach record levels during November and December this year and will grow between 3% and 4% from 2022 to between $957.30 billion and $966.60 billion.

“It is not surprising to see holiday sales growth returning to pre-pandemic levels,” said Matthew Shay, NRF President and CEO. “Overall household finances remain in good shape and will continue to support the consumer’s ability to spend.

Expanding Store Footprint

During the first quarter of 2024, the company opened ten new locations and plans to open approximately 33 locations over the coming year, up from 23 a year ago.

Costco currently operates 871 warehouses, including 600 in the U.S. and Puerto Rico, 108 in Canada, 40 in Mexico, 33 in Japan, 29 in the United Kingdom, 18 in Korea, 15 in Australia, 14 in Taiwan, five in China, four in Spain, two in France, and one each in Iceland, Sweden, and New Zealand.

In addition, the big-box retailer operates e-commerce sites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia.

Impressive Historical Growth

COST’s revenue and EBITDA grew at respective CAGRs of 12.4% and 13.2% over the past five years. Its EBIT increased at a CAGR of 13.9% over the same period. Moreover, the company’s earnings from continued operations improved at a CAGR of 14.1% over the same time frame.

Furthermore, the company’s net income and EPS increased at CAGRs of 14.7% and 14.6% over the same period, respectively, while its total assets improved at a CAGR of 7%.

Upbeat Analyst Estimates

Analysts expect COST’s revenue for the second quarter (ending February 2024) to grow 6.1% year-over-year to $58.64 billion. The consensus EPS estimate of $3.56 for the ongoing quarter indicates an 8% year-over-year increase. Moreover, the company has surpassed the consensus EPS estimates in three of the trailing four quarters, which is remarkable.

For the fiscal year ending August 2024, the retailer’s revenue and EPS are expected to increase 4.8% and 10.3% year-over-year to $253.91 billion and $15.61, respectively. Further, Street expects COST’s revenue and EPS to grow 6.7% and 9.2% from the previous year to $270.89 billion and $17.05, respectively.

Mixed Profitability

COST’s trailing-12-month ROCE, ROTC, and ROTA of 27.37%, 16.55%, and 8.84% are considerably higher than the respective industry averages of 11.68%, 6.92%, and 4.83%. However, the stock’s trailing-12-month gross profit margin of 12.53% is 63% lower than the industry average of 33.89%.

Additionally, the stock’s trailing-12-month EBITDA margin and net income margin of 4.42% and 2.65% are lower than the industry averages of 11.26% and 4.90%, respectively. Its trailing-12-month levered FCF margin of 2.83% is 41.7% lower than the industry average of 4.86%.

Elevated Valuation

In terms of forward non-GAAP P/E, COST is currently trading at 42.60x, 136.8% higher than the industry average of 17.99x. Also, the stock’s forward EV/EBITDA and EV/EBIT of 25.28x and 31.75x are significantly higher than the industry averages of 11.25x and 15.30x, respectively.

Further, the stock’s forward Price/Book multiple of 11.77 is 313.6% higher than the respective industry average of 2.85. Its forward Price/Cash Flow of 29.01x is 114.4% higher than the industry average of 13.53x.

Price Target Upgrades

On December 21, equities researchers at Truist Financial raised their price objective on COST stock from $693 to $741. The firm currently has a Buy rating on the retailer’s stock. On December 15, Stifel Nicolaus raised his target price on the stock from $615 to $675 and gave the stock a Buy rating.

Analysts at TD Cowen boosted their price target on COST from $680 to $700, maintaining their Overweight rating. The analysts believe that the company can continue to grow via new stores and increased traffic.

Also, Jefferies analyst Corey Tarlowe increased his target price on Costco’s stock to $725 from $680 and maintained a Buy rating.

“Looking ahead, Costco’s strong value offering, high renewal rates, and club expansion plans make Costco well-positioned, in our view,” Tarlowe wrote in a research note.

Bottom Line

COST’s revenue and earnings surpassed analysts’ expectations in the first quarter of fiscal 2024. With Costco outshining its retail rivals as indicated by its upbeat last reported financials, the company announced a special dividend of $15 per share, its biggest one yet.

In addition to this special dividend, the membership-based warehouse retailer pays a regular quarterly dividend of $1.03 per share. The impressive dividend payout reflects the company’s commitment to returning value to its shareholders and its ability to provide stable growth in the long run.

While analysts seem bullish about Costco’s growth prospects driven by new stores and increased membership and traffic, the stock’s valuation is excessive right now, which is a legitimate concern. An excellent business could be a lousy investment if you overpay for the stock.

Given its stretched valuation and mixed profitability, it could be wise to wait for a better entry point in this stock.

3 Stocks to Fall Into as 10-Year Treasury ‘Screams Buy’

is prudent to explore why UnitedHealth Group Incorporated (UNH), Costco Wholesale Corporation (COST), and NextEra Energy, Inc. (NEE) could be wise portfolio additions now. Read on…


The 10-year Treasury yield surpassed 4.2%, and just a few weeks earlier, it hit its highest level since 2008, indicating investors are delaying their expectations regarding potential interest rate cuts by the Fed.

BMO Capital Markets head of U.S. rates strategy Ian Lyngen regards this uptick as a compelling opportunity for investors. In his view, the 10-year Treasury bond is a "screaming buy" for investors, owing to the Fed's successful endeavors in combating inflation.

Treasury yields and the stock market traditionally display an inverse relation. Still, defensive stocks, such as healthcare, utilities, and consumer staples, defined by their necessity, remain resilient. These sectors tend to preserve their revenue streams and overall stability, notwithstanding the volatility of the market conditions.

Before delving into the fundamentals of the stocks that could be solid buys now, it is crucial to understand the larger economic forces at play.

Why 10-Year Treasury Yield Is Rising

The Federal Reserve has implemented an 11th benchmark rate increase, announcing a 25-basis-point rise in July, escalating the interest rates to a 22-year high of 5.25% to 5.5%. Despite inflation notably declining from a 9.1% peak in June 2022 to 3.2% in July 2023, it still remains above the Fed’s 2% target.

In job market, the U.S. Bureau of Labor Statistics reported an increase in August's unemployment rate to 3.8%, up from July's 3.5% and reaching the highest since February 2022. Despite this, positive signals came from average hourly earnings, which showed a 0.2% increase for the month and a year-over-year increase of 4.3%. Furthermore, the U.S. economy outstripped forecasts with 187,000 new jobs.

In addition, American consumer spending showcased resilience, with sales at U.S. retailers picking up 0.7% month-over-month in July. Retail sales grew 3.2% year-over-year. Private consumption, which makes up nearly 70% of the U.S. GDP, remains strong, bolstered by sustained low unemployment and solid wage growth.

Some analysts had mooted that the Fed's rate hike spree might end. However, recent robust economic data have cast doubt on these assumptions, and uncertainty about its future monetary policy continues. Officials expressed concern in minutes from the Fed's July meeting that further rate increases could be a necessity due to the potential for persistent price rises.

As is generally understood, bond yields and bond prices follow an inverse relationship. Therefore, as interest rates increase, current bond prices tend to fall, consequently raising yields.

Respected market analyst Ed Yardeni predicts the 10-year Treasury yield could further escalate, spurred by increasing anxieties over the U.S. debt levels. He speculates that this yield could exceed 4.5% this year, potentially triggering a sell-off in the S&P 500 of up to 10%.

Why Are Treasury Securities Screaming Buys Now?

The government backs Treasury securities. Historically, the U.S. has always paid its debts, which helps to ensure that Treasurys are the lowest-risk investments one can own. 10-year Treasury bonds make interest payments every six months.

The market for U.S. Treasurys is the largest, most liquid market in the world, making them easy to sell if one needs access to their cash before the maturity date.

Chase Lawson, author of ‘Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth,’ believes that there’s consistent income potential with Treasury bonds, and one’s investment likely would not decline if the stock market tanks, like other investment vehicles, can do.

Since interest rates could remain high for a while, the 10-year treasury yield is anticipated to maintain momentum.

Stocks That Could Perform Well Even When Treasury Yields Are Rising…

High bond yields might potentially signal warning signs for stocks. Bonds compete for the same investor dollars as equities, and when yields surge, equities often go down. This trend arises because bonds, especially those with higher yields than stocks, usually become more attractive. Furthermore, while stocks carry inherent risk, bonds offer a safer option.

When the 10-year Treasury bond yield is strong, investing in stocks less influenced by interest rates is typically wise. Enterprises involved in utilities, consumer staples, and healthcare sectors tend to present stable earnings and cash flows and are less vulnerable to interest rate fluctuations.

Defensive stocks provide stable earnings and consistent returns, even amid an economic downturn. These stocks are nearly always in demand because they provide essential products and services.

Below, we look into the fundamentals of three stocks worth considering under current market conditions:

UnitedHealth Group Incorporated (UNH)

The U.S. ranks among the nations with the highest healthcare expenses globally. Compounded by the fact that these costs are increasing at a rate that exceeds inflation, health insurance has transitioned from an optional safeguard to a fundamental necessity.

With a robust market capitalization of $443.40 billion, the Minnesota-based health insurer UNH operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx.

The corporation reigns as the largest healthcare company in the United States, eclipsing even the biggest banks in the country. Its substantial stature is deemed a bellwether within the extensive health insurance sector. The company's robust performance stems from the contributions of two major business units, UnitedHealthcare and Optum.

These entities continually endeavor to deliver patient-centric healthcare services at reasonable prices across numerous American communities and follow a strategic alliance with reputable care systems.

UNH recently announced a dividend payout of $1.88 per share, payable on September 19, maintaining its commitment to stockholder returns.

UNH’s revenue grew at 12% and 10.3% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 7.9% and 7.3%, respectively.

For the second quarter that ended June 30, 2023, the healthcare giant saw $92.90 billion in revenue, a 15.6% surge. This escalation was chiefly driven by double-digit expansions within its insurance division and Optum Health Services wing. Its earnings from operations rose 13% from the year-ago value to $8.06 billion.

Moreover, adjusted net earnings attributable to UNH common shareholders grew 9.1% year-over-year to $5.77 billion, whereas adjusted EPS increased 10.2% from the prior year’s quarter to $6.14, topping analyst expectations of $5.99.

Year-to-date, the total number of people served by UnitedHealthcare with medical benefits has increased by over 1.1 million. Growth across the company’s commercial benefit offerings indicated the corporation's emphasis on innovative and reasonably priced benefit plans.

Meanwhile, the number of people catered to by the company's senior and community offerings grew by 625,000 due to product and benefit customizations to meet the unique needs of the aging population and economically disadvantaged individuals.

UNH’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently changed their UNH stock holdings.

Institutions hold roughly 87.3% of UNH shares. Of the 3,307 institutional holders, 1,623 have increased their positions in the stock. Moreover, 155 institutions have taken new positions (1,445,591 shares).

Costco Wholesale Corporation (COST)

With a market cap of $241.18 billion, COST, the prominent warehouse club operator, continues to exhibit strong performance driven by strategic growth plans, optimized pricing policies, and substantial membership trends. These elements have been instrumental in bolstering the solid sales figures for the company.

COST’s revenue grew at 13.5% and 11% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 15.8% and 17.4%, respectively.

Sales momentum continued through August, with net sales showcasing a 5% year-over-year increase to $18.42 billion for the retail month, an impressive follow-up to the 4.5% enhancement witnessed in July.

As the U.S. observed Labor Day, budget-minded shoppers looked forward to making the most of the annual sales. COST had put forth Labor Day promotions on an array of products, a move likely to boost the company’s sales figures further.

COST's business model of leveraging economies of scale and maintaining low-profit margins creates a virtuous cycle that perpetuates customer loyalty and fosters a competitive edge. This deliberate choice of prioritizing customer satisfaction over immediate profits has proven fruitful, significantly contributing to customer retention and repeat business–crucial elements in today’s highly competitive retail industry.

The catalysts driving COST's growth include its ongoing global expansion and remarkable renewal rates. The company continues to amplify shareholder value with shareholder-friendly management, reliable dividend payouts, and efficient capital reinvestments.

Its unique membership business model and pricing power distinguish it from its traditional counterparts. As of the third quarter of 2023, it revealed an encouraging 92.6% renewal rate within the U.S. and Canada, which testifies to robust customer loyalty levels and satisfaction.

The impressive renewal rate guarantees consistent revenue flow from membership fees, increases customer lifetime value, and enhances overall profitability. As the quarter concluded, COST reported having 69.1 million paid household members and 124.7 million cardholders.

Changes have been observed concerning institutions' holdings of COST shares. Approximately 68.1% of COST shares are presently held by institutions. Of the 3,168 institutional holders, 1,456 have increased their positions in the stock. Moreover, 212 institutions have taken new positions (1,307,195 shares), reflecting confidence in the company’s trajectory.

NextEra Energy, Inc. (NEE)

With a market cap of $135.33 billion, NEE stands as a leading utilities provider in the industry. The company focuses on generating renewable, clean, and sustainable power, serving millions of customers across North America.

Highlighted by its robust historical performance, NEE has presented a compelling case for investor interest with consistent, long-term dividend growth that offers shareholders stability and income. Particularly noteworthy is the company's anticipation to increase its dividend per share by approximately 10% annually through 2024, based on dividends from 2022. This strategy confirms confidence in potential cash-flow growth that supports these higher dividends.

NEE's impressive financial figures testify to its efficient management and ability to maintain regular profit generation even in a highly competitive sector. The growing earnings base allows it to return significant cash to its shareholders.

NEE’s revenue grew at 13.5% and 11% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 15.8% and 17.4%, respectively.

For the fiscal second quarter that ended June 30, 2023, the company’s operating revenues stood at $7.35 billion for the quarter, up 41.8% year-over-year, exceeding analyst projections. Its adjusted earnings per share stood at $0.88, up 8.6% year-over-year.

NEE's long-term financial expectations remain unchanged. For 2023 and 2024, it expects adjusted EPS to be in the ranges of $2.98 to $3.13 and $3.23 to $3.43, respectively. For 2025 and 2026, adjusted EPS is expected to come between $3.45 to $3.70 and $3.63 to $4.00, respectively.

As a result of its dedication to environmental sustainability and consistent shareholder value creation, NEE has captured the attention of investors and market analysts. Ownership data indicates institutional holders have a significant interest in NEE, accounting for approximately 77.7% of NEE shares. Of the 2,557 institutional holders, 1,206 have increased their positions in the stock. Moreover, 134 institutions have taken new positions (5,266,359 shares), reflecting confidence in the company’s trajectory.


In conclusion, the U.S. stock market seems to have a strong foundation of sturdy economic growth and investor credibility in defensive equities, particularly those offering dividends, as a safeguard against inflation. Even though rising bond yields could potentially destabilize specific sectors, stocks less sensitive to interest rate variations and displaying consistent earnings and cash flow are optimally positioned to yield substantial returns.

Walmart (WMT) vs. Costco Wholesale (COST) vs. Target (TGT): Navigating Inflation's Impact on Grocery Chains

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically free money to spending like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement eleven interest-rate hikes in a span of 16 months, taking the benchmark borrowing cost to 5.25%-5.50%.

Meanwhile, with the pandemic firmly in the rear-view mirror, Americans have been going above and beyond to compensate for the years spent indoors trying to substitute real experiences with virtual ones.

However, with the stash of stimulus cash fast dwindling, average American consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money, which has gotten dearer so that more of it can be set aside in favor of outdoor experiences instead of manufactured goods.

Consequently, they have been forced to trade down to budget-friendly retailers, leaving the businesses that offer something in between wrong-footed and stranded. Although budget retailers have lost sales from low-income consumers, that loss has been offset by increased business from the middle-income consumer segment.

However, not budget retailers are created equal. Hence, let’s take a closer look at three such retailers' varying fortunes and prospects.

Walmart Inc. (WMT) has been relatively immune to the seismic shifts in the consumption ecosystem, as discussed in our piece on June 22. Hence, despite closing 21 stores in 12 states and DC this year owing to poor financial performance being cited by the company, the big-box retailer surpassed Street expectations for both earnings and revenue for the second quarter of fiscal year 2024.

Encouraged by the strong performance, WMT also raised its full-year guidance. It said it now anticipates consolidated net sales will rise by about 4 to 4.5% in the fiscal year. It expects adjusted earnings per share for the full year will be between $6.36 and $6.46.

WMT’s e-commerce sales for the U.S. also jumped 24% year-over-year as customers bought more items from the company’s growing third-party marketplace and placed more orders for store pickup and delivery.

With the double-edged sword of inflation cutting both ways, while WMT attracted new and more frequent shoppers, including younger and wealthier customers looking for both convenience and value, the shift back to services is taking a bite out of sales of goods, particularly after a pandemic-fueled spending boom. Consequently, consumers have been buying fewer discretionary items, such as electronics and home appliances, and trading down for lower-priced items.

Since general merchandise prices have dropped compared with last year, WMT saw a “modest improvement” in sales of big-ticket and discretionary items like electronics and home goods during the quarter. According to the CFO, John David Rainey, the retailer also had fewer markdowns as the inventory was down by 5% at the end of the second quarter compared to a year ago.

Moreover, as food prices remained steady, and some staple grocery items have fallen, shoppers have been buying more fresh meats, seafood, and eggs, accounting for nearly 60% of the annual U.S. sales for the nation’s largest grocer.

Although consumers are facing newer challenges, such as the return of student loan payments, with the Back-to-School season getting off to a strong and early start and with stock price gains of more than 10% year-to-date, WMT is looking forward to the holiday season with cautious optimism.

Warehouse club Costco Wholesale Corporation (COST) found its famous $1.50 hot dog and soda combo back in the headlines as inflation bit harder to squeeze pockets further. The hot dog combo and its rotisserie chicken, whose price has been pegged at $4.99 since 2009, are the retailer’s loss leaders that lure in customers who are likely to buy other items as well.

This could be helpful, especially in times like these in which, according to CFO Richard Galanti, even COST’s relatively well-to-do members have been ditching pricier beef products for cheaper meats such as pork and chicken, while others are bypassing the fresh meat aisle entirely and opting for cheaper canned meat and fish products with longer shelf life. Even the retailer has been forced to restrict itself from handing out unlimited free samples to shoppers.

Ahead of its earnings release, analysts expect COST’s revenue and EPS for the fourth quarter of fiscal year 2023 to increase by 8.3% and 14.5% year-over-year to $78.05 billion and $4.82, respectively. As a result, its revenue and EPS for the fiscal would increase by 6.3% and 9.8% year-over-year to $241.23 billion and $14.58, respectively. That could lend momentum to the stock, which has gained more than 19% year-to-date.

At the other end of the spectrum, Target Corporation (TGT), which also caters to value-conscious shoppers, missed Wall Street’s sales estimate for the fiscal second quarter and consequently slashed forecasts for the year ahead. The company expects comparable sales to decline by about mid-single digits for the full fiscal year and earnings per share to range from $7 to $8, from a previously expected range of $7.75 to $8.75.

One of the reasons behind this bearish outcome and outlook could be the shifting patterns of consumer expenditure, which was redirected to prioritize groceries over discretionary items to make room for outdoor experiences.

As a result, TGT, which caters to a segment generally more affluent than that served by WMT and draws only about 20% of its yearly revenue from grocery, found its top line getting negatively impacted and even its online sales declining by 10.5% year-over-year. However, given the higher margins on non-essential items compared to those for food items, TGT’s quarterly EPS of $1.80 exceeded Street expectations of $1.39.

TGT is taking measures to stem the rot, including remodeling its digital experience in the next three months. The remodeled site would include different landing experiences, more personalized content, enhanced search functionality, ease of navigation, and other updates to bring more joy and convenience to our digital guests.

However, even as WMT has been experiencing a “modest improvement” in discretionary goods, such as blenders, hand mixers, and other kitchen tools in the second quarter, as some consumers cook more at home, TGT has not shared the same optimism.

With the Back-to-School season in its early days, sales of frequency categories, such as food and beauty items, have not been enough to offset weaker discretionary sales at the retailer, which has seen its stock price decline by more than 19% since the beginning of the calendar year.

Bottom Line

With increased borrowing costs expected to keep weighing on the economy in the foreseeable future, WMT is expected to keep benefiting from consumers’ shift to essentials, which could offset weaker clothing and electronics sales until a potential recovery at the beginning of the holiday season.

Meanwhile, in order to manage and improve slimmer margins from food items compared to general merchandise, WMT has been doubling down on initiatives to increase the efficiency of its operations through innovations in packaging and Artificial Intelligence (AI) and Machine Learning (ML).

Hence, given its stronghold on sales of low-margin and high-volume groceries and other essentials, shoots of recovery in discretionary expenditure, and ever-growing moat by figuring out what the customer wants to buy and how best to get it to them, WMT’s prospects appear to be the most promising of the three retail chains.

Analyzing the Future of Retail Stocks and How Investors Can Stay Ahead

After registering 0.2% and 1% declines for two consecutive months, on May 16, the advance sales report showed a recovery of 0.4% in retail sales for April. However, this modest rebound missed the Dow Jones estimate of a 0.8% increase.

This muted outlook has also been reflected in the first quarter earnings of Macy's, Inc. (M). Although the mid-tier retailer surpassed the earnings estimates for the quarter, a spring pullback has caused it to miss its revenue estimates and slash its top- and bottom-line guidance for the entire year.
Given the prevailing demand softness in the unfavorable macroeconomic environment, M expects sales of $22.8 billion to $23.2 billion for the year, down from the previous expectations of $23.7 billion to $24.2 billion. The company now expects earnings per share of $2.70 to $3.20, significantly down from the previous guidance of $3.67 to $4.11.

With M joining its peers, such as Nordstrom, Inc. (JWN) and Dollar General Corporation (DG), in reporting lackluster performances, let’s explore what this means for the prospects of retail businesses relative to another sector that has been claiming a greater share of consumers’ budget lately.

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically-free money to spending like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement ten successive interest-rate hikes in a little over a year to take the Fed funds rate to a target range of 5% to 5.25%.

With consumer debt pushing past $17 trillion to come in at an all-time high during the previous quarter, average American consumers have been forced to rein in their urge to splurge to prevent inflation from biting harder. The Survey of Consumer Expectations for April carried out by the New York Fed showed that the outlook for spending fell by half a percentage point to an annual rate of 5.2%, the lowest since September 2021.

As a result, the middle-income and aspirational consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money which has gotten dearer, as has been witnessed in other periods of economic slowdown throughout history.

Hence, they have been forced to trade down to budget-friendly retailers, such as Walmart Inc. (WMT), which usually cater to low-income consumers leaving the businesses that offer something in between being wrong-footed and stranded.

Although budget retailers have lost sales from low-income consumers, that loss has been offset by increased business from the middle-income consumer segment, who have been frequenting such stores to shop for groceries and other non-discretionary products, contributing to most of the sales.

Consequently, weaker sales have cut across Macy’s brands, including higher-end Bloomingdale’s and beauty chain Bluemercury. According to CEO Jeff Gennette, the “aspirational customer” who shopped more luxury brands has dropped off as stimulus money has dried up.

Likewise, warehouse club Costco Wholesale Corporation (COST) found its famous $1.50 hot dog and soda combo back in the headlines as inflation bit harder to squeeze pockets further. The hot dog combo and its rotisserie chicken, whose price has been pegged at $4.99 since 2009, are the retailer’s loss leaders that lure in customers who are likely to buy other items as well.

This could be helpful, especially in times like these in which, according to CFO Richard Galanti, even COST’s relatively well-to-do members are ditching pricier beef products for cheaper meats such as pork and chicken, while others are bypassing the fresh meat aisle entirely and opting for cheaper canned meat and fish products with longer shelf life.

However, a decline of 0.3 percentage points in the overall outlook for inflation over the next year suggests that things could improve, but probably not before they worsen.

Despite current economic uncertainties and hardships, high-income segments have been relatively unaffected, with affluent patrons queueing up for finer things in life on offer from the likes of Tiffany & Co. and LVMH.

Another sector that’s seemingly unaffected by the mundane hardships of the retail businesses is the colorful world of leisure travel. While the pandemic is firmly in the rearview mirror, there is enough pent-up demand from consumers ever keener to redeem their pile of airline miles and other travel rewards on their credit cards through revenge travel.

Moreover, with a jump of 0.8% in spending in April, with personal consumption expenditure beating estimates to rise 0.4% for the month despite ten consecutive interest-rate hikes by the Federal Reserve, it isn’t difficult to connect the dots and understand why airlines, such as American Airlines Group Inc. (AAL) have turned to bigger airplanes, even on shorter routes, to help ease airport congestion and find their way around pilot shortages.

As a result of this tailwind, AAL’s revenue surpassed the airline’s cost to help it report a $10 million profit during the first quarter of the fiscal year. Moreover, with fuel prices yet to rise significantly due to a stuttering recovery of the Chinese economy and Memorial Day travel topping 2019 levels, the operator has raised its adjusted earnings outlook for the second quarter.

Down at sea, cruise liners such as Norwegian Cruise Line Holdings Ltd. (NCLH) have also found it smooth sailing, with the cumulative booked position for 2023 coming in higher than 2019 levels and occupancy of 101.5% during the first quarter also exceeding the company’s expectations.

The increased demand for, and consequently expenditure on, services and experiences are also evident in the recent employment data, with leisure and hospitality adding 208,000 positions out of the expectation-beating private sector employment increase of 278,000 for the month of May. The sector was also a notable contributor to the increase of 339,000 in non-farm payrolls for the month.

The altered priorities of consumers are also reflected in the stock price action. While M’s stock slumped by more than 19% YTD, AAL and NCLH gained around 19% and 43% over the same period.

Looking Ahead

While it would be an understatement to say that the momentum is firm in the travel and hospitality sector, it might be wise to consider certain things before indulging in the willful suspension of disbelief and extrapolating beyond the foreseeable future.

Since the rise of remote work and virtual teams, facilitated by contemporary collaboration and productivity tools, seems to have become an immune and immutable remanent of the cultural sea-change our work and lives had to adopt and adapt to during the pandemic, new reports give us reasons to doubt whether business travel is ever going back to normal.

In such a situation, with traveling for leisure being an occasional indulgence in most of our lives, there are risks that the pent-up demand might not be enough to sustain the momentum that is propelling the growth performance of travel and hospitality businesses.

Moreover, since technology companies such as Apple Inc. (AAPL) and Meta Platforms, Inc. (META) are finding increasingly innovative ways to immerse people in experiences without needing them to leave their homes, long-term investors with significant leisure and travel sector could find themselves looking nervously over their shoulders over time.

However, businesses in the retail sector, especially the non-discretionary variety, should be able to help their stakeholders sleep easily, knowing that while wants and desires are temporary, needs are permanent, and technology can’t single-handedly fulfill them (yet).