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U.S. December retail sales came in stronger than expected. Retail and food services were up 0.6% month-over-month, and the ex-autos category was up 0.4% m/m, suggesting that retailers had a jolly holiday season. Two categories that stood out in December were clothing & clothing accessories stores, where sales were up 1.5% m/m, and department stores, which saw a 3.0% m/m growth. (Exhibit 1) Coincidentally, both these sectors had the most amount of merchandise on sale, and the highest discounts during the holiday season. Thus, although consumers have proved to be resilient in 2023, they are also very much value-oriented. They have been conditioned to open up their wallets if they feel they are getting a good promotion.

Sales at restaurants/bars saw the strongest year-over-year contributions at 11.1%. This is in line with the LSEG earnings data suggesting that when consumers decide on discretionary spending, they continue to gravitate towards restaurants and bars.

Exhibit 1: U.S. Retail Sales – December 2023

Source: LSEG IFR

Q4 retail/restaurant earnings growth outlook

For Q4 2023, the LSEG Retail/Restaurant Index is looking at a 26.3% blended estimated earnings growth rate and a 4.0% blended estimated revenue growth rate.

Six out of the 10 consumer-related industries have turned negative. The Hotels, Restaurant & Leisure sector continues to be on track to record one of the highest estimated earnings growth rates in the fourth quarter, an 82.7% surge over last year’s level (Exhibit 2). This is in line with the latest U.S. retail sales data showing that restaurant and bar traffic is much stronger than a year ago.

This forecast for Q4 2023 shows that consumers continue to gravitate towards experiences rather than mall visits. Similarly, the forecast for 2024 shows that this trend is expected to continue for the remainder of the year.

Exhibit 2: Q4 2023 Earnings Growth Rates: LSEG Retail and Restaurant Index

Source: LSEG I/B/E/S

Discount levels – U.S. online retailers

The discount penetration (how much of the assortment is on sale) has declined this year. LSEG discovered this in collaboration with Centric Market Intelligence, formerly StyleSage, which analyzes retailers, brands, online trends, and products across the globe. Two possible reasons are that the holiday sales season was robust, and retailers are being conservative with their inventory into 2024. For January, the discount penetration is 26%, below the 2023 average of 35%, as retailers introduce the new full-priced spring merchandise.

Still, the average percent discount in January has remained steady at 38.3%, above the 2023 average of 37.8%.

Exhibit 3: Discount Penetration and Average Discount: U.S. Online Retailers

Source: Centric Market Intelligence, formerly StyleSage Co.

Consumer confidence stabilizes

The index bounced back from last month’s decline and has now shown a significant month-over-month change in back-to-back months following three months of stability. The index now sits nearly three points above its reading to begin 2023 (50.2).

January’s LSEG/Ipsos Primary Consumer Sentiment Index finds that overall American consumer confidence has risen slightly to begin 2024. This month’s uptick was largely driven by increases in both job security and purchasing confidence, and the latest jobs report reflects this more-positive sentiment. However, despite overall increased confidence, Americans’ future economic expectations remain stable for what is now the fifth consecutive month, signaling that some Americans aren’t holding out hope for what’s to come.

Similarly, sentiment amongst analysts polled by LSEG has also risen slightly. They have been revising earnings estimates upwards as retailers get ready to report Q4 2023 earnings. As a result, the LSEG U.S. Retail and Restaurant index is expected to show a 26.3% earnings growth over last year’s levels.

Exhibit 4: LSEG/Ipsos Consumer Sentiment Index

Source: LSEG/Ipsos

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