Retail’s Surprisingly Big Month

In this episode of Market Foolery, host Chris Hill is joined by Motley Fool analyst Maria Gallagher. Retail sales in March grew nearly 10%, and shares of American Eagle Outfitters (AEO 2.49%) hit an all-time high after the company raised guidance for the first quarter. Also, Pepsi's (PEP -2.53%) snack division did the heavy lifting in the company's first-quarter report, and Maria shares why she's not a great snacker.

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This video was recorded on April 15, 2021.

Chris Hill: It's Thursday, April 15th. Welcome to Market Foolery. I'm Chris Hill, with me from the financial capital of the United States of America, it's Maria Gallagher. Thanks for being here.

Maria Gallagher: Thanks so much for having me.

Hill: We've got consumer goods, we've got apparel retail, but we are going to start today with a little bit of the big macro. The U.S. Commerce Department reported that retail sales in March rose nearly 10%. That was significantly higher than expected, and we can go in any direction you want here. If you're looking by category: sporting goods, clothing, food, and beverage were all up significantly. For anyone who was worried that people getting stimulus checks were going to put them in the bank, [laughs] don't worry about that anymore because it looks like they put them to work and they're spending money.

Gallagher: Yeah, I think it's super interesting. It's a combo of factors. You see there's easing of restrictions for states, there's increasing vaccinations and pent-up demand, and the roll out of the third round of simulate checks all combined brought a really big jump in retail sales in March. So the bar and restaurant industry was up 13.5%. Sporting goods spending or hobby spending was up over 23%. Clothing and accessories were up for almost 20%. Motor vehicle parts and dealers were up another 15%. This is compared to in May of 2020; after the first round of stimulus checks, there was a jump of about 18.3%. But consumer confidence is at its highest level since COVID began, and the U.S. employers added 916,000 jobs in this past month, so the unemployment rate is down to about 6%. All really positive signs for an economic recovery in the next couple of months.

Hill: It brings to mind a couple of things and I am glad you mentioned the recent jobs report. We're Foolish investors, we focus on the businesses, we focus [laughs] on the leadership, all that sort of thing, but this is one of those macroeconomic data points that when you put it in context, really does point to great counterpoint to anyone out there who is wondering how much higher can the market go. The market's at an all-time high. I mean, the S&P 500 is hitting another new high today. For people who are wondering, how much higher can the market go? Well, it can go higher because [laughs] on the yields of the latest jobs report, the expectation was that spending was going to grow 6%, it grew nearly 10%. That's a massive increase. Already people are looking ahead and trying not to jinx things for the April jobs report, which we'll get in a couple of weeks. It really is pretty interesting to see how this has played out. But again, I don't want to jinx anything. Particularly when it comes to when you think about the food and beverage industry, when you think about the restaurants and bars and that sort of thing, there is a version of this where we slowly, methodically open back up. If we do this the right way, then I think it means tremendously good things for that industry.

Gallagher: Yeah, I agree. They're now forecasting U.S. economic growth of up to over 6% in 2021, which is much higher than originally forecasted. I think experts are saying, "We weren't sure about what this pent-up demand would look like. We're not sure what the long term impact of this unemployment would be or what the impacts of these stimulus checks would be." Now they're seeing that pent-up demand comes in strong. People are excited about going out again. People are willing to go out again. They've hopefully been able to retain work, build up some savings with the stimulus checks, whatever they're doing. As more jobs can roll in, more people can get the economy back to normal. I think that it's really giving a lot of these economists and these people more faith in how this recovery can look.

Hill: Did anything in this report surprise you? Because I got to be honest, the sporting goods being up 23% over the previous month, that category surprised me. It was great to see, but I definitely wouldn't have predicted that.

Gallagher: I was surprised by the motor vehicle parts, up 15%. I think there has been more of an increase in buying cars. But as someone who lives in the city, I'm always surprised by how many people buy cars all the time.

Hill: Speaking of where people are spending their money, shares of American Eagle Outfitters are hitting an all-time high this morning after the company said they expect revenue in the first quarter to top $1 billion. I've said plenty of times that I think apparel retail is such a tough place for investors because it seems like every publicly traded company in the apparel retail space, at some point in the past decade, they've put together a good run for a year or so, but it's almost like you have to time the market with them. You look at the last five years for American Eagle, it's a pretty good track record they have built up.

Gallagher: Yeah. I think it's pretty fascinating about American Eagle is their growth story really revolves around the Aerie brand. So you see two different stories. They're trying to focus on growth within Aerie, and then they are trying to focus on capital allocation and streamlining profitability within that core American Eagle brand. Aerie is their loungewear, swimwear, intimate and soft apparel segment. You might be familiar with their real models. They have no touch-ups, they celebrate diversity. So that's been a really popular consumer branding strategy for them in the past. Their 2023 target has a total revenue of $5.5 billion, and that's really fueled by Aerie growth. That $3.5 billion is American Eagle, which is about holding steady and two billion of Aerie, which is overdoubling from where they are today. They have a really big market within Aerie. They have a $65 billion addressable market within that segment. 

I think it's really interesting because they're growing within there, and then with the core American Eagle segment, they're actually decreasing the amount of store count. They're at 880 stores now. They're targeting 600-700 in the next couple of years. But they are still the No. 1 favorite brand for jeans. So they're trying to maintain that revenue and increase profitability. So you see two different things happening with American Eagle, but I think it's really smart allocation strategies for American Eagle and really exciting growth strategies for Aerie, and we're seeing both of those play out pretty much according to plan.

Hill: It's interesting about the store count because dramatically more American Eagle stores than there are Aerie stores. When you get a sense of their growth strategy with the Aerie brand, do you think they're doing a good job of balancing store count versus digital sales?

Gallagher: I think so because they're targeting a lot of digital sales for Aerie. So as they grow out that Aerie store count, I think they're going to have smaller store footprints, which is important for those overall same-store sales growth. I think that'll be really interesting to see what those stores look like moving forward, but I do think that they are focusing a lot on their digital strategy and they have their plan to increase consumer spending within the Aerie brand and increase the number of customers within that Aerie brand as well and the amount of activewear as their next, I think, forays, expanding from intimates and loungewear now more to activewear.

Hill: Last thing before we move on, within the apparel retail space, is American Eagle starting to separate itself as a business from the Abercrombie & Fitches of the world?

Gallagher: I think that the way they've been able to pivot toward Aerie in a really smart way and they stand out in terms of their marketing, in terms of their plan for eco-friendly clothing, I think that they really take the pulse of the consumer well and have pivoted in a really strong way. So I respect that in a way that I don't know that a lot of other retailers have been able to. I'm excited to see what they do moving forward.

Hill: Two quick things before we get to our last story. First, next week, we're going to have our 2,000th episode of this show.

Gallagher: Wow, congrats.

Hill: I don't really know how to feel about that. It was one of those things, I was like, "I think we're coming up." Yeah, next week is going to be the 2,000th episode of the show. Hopefully, by episode 2,000, I'll figure out how to feel about that. But at the moment, I'm just feeling old. Second thing, as always, if you are looking for more stock ideas for your watch list, you can check out Stock Advisor. It is the flagship service here at the Motley Fool. It's been around a lot longer than MarketFoolery has been. You get stock recommendations from Tom and David Gardner. You get their Best Buys Now and a lot more. Go to stockideas.fool.com and get a 50% discount for being one of the dozens of listeners. I'm not sure why we're giving away that much money, but we've decided to do that. So stockideas.fool.com. Pepsi's profits and revenue came in higher than expected in the first quarter. Maria, once again, I'm reminded of the diversification of the Pepsi Corporation's business, how it really paid off once again because the Frito-Lay snack division was doing the heavy lifting here.

Gallagher: Yeah. As you know, I love to come on and talk about snack food. So PepsiCo had revenue growth of 6.8% last quarter and earnings-per-share growth of almost 30%. They held or gained market share across most of their key global snack and beverage markets, with notable improvements in U.S. snacks and beverages. Then in terms of international growth, I really like these phrasings. They gained savory share in many of the largest international markets, including Mexico, Brazil, China, and Russia. They also gained beverage share in the U.S., Russia, Saudi Arabia, and Thailand. Like you said, Frito-Lay really did a lot of the heavy lifting. It had two-year organic revenue growth of 10% and 3% organic revenue growth. This quarter, Quaker had about 1% revenue growth. But that's lapping a pretty difficult comparison because as of March of last year, as we see, some of these companies will have either a very easy March of last year to overcome this year or a very difficult, and Quaker is one of those more difficult ones, as people had increased consumer demand for snack food and buying things in bulk at home. 

Then they had some strong growth in PepsiCo North America and their international business. I wanted to note that their better agenda is achieving their climate goal of net zero emissions by 2040, which is 10 years pre the Paris Climate Agreement. They highlighted that as well, which I think is exciting for brands, and when you think of these big conglomerates, I think we always like to see them, or I at least like to see them, putting some sort of focus on sustainability moving forward as well.

Hill: To go back to what we saw in the March retail report in terms of restaurants and bars, Pepsi, and you can throw Coca-Cola in there as well, they're going to benefit by stadiums opening up, by return to live events, concerts, etc., and bars and restaurants. Because never forget, the profit margins on those fountain drinks is just so much better for Pepsi and Coca-Cola than it is when you're buying a six pack.

Gallagher: Yeah. As people are going on more road trips, stopping off at gas stations to get, I can't imagine a road trip without some good Tostitos, or Lay's, or Ruffles.

Hill: What is your snack? When I say snack, of course I'm referring to sort of the salty, savory snack.

Gallagher: I'm not a great snacker, but I think in my ultimate times of snacking, probably Cheetos. I was a big Cheetos fan.

Hill: When you say you're not a great snacker, what does that mean? Because there's some people who are like, "I'm not a great snacker," and what they mean is like, "I don't really eat a lot of snacks." Some people, when they say, "I'm not a great snacker," they mean, "I always have a bag of Cheetos."

Gallagher: No, I'm not a great snacker, my snacking is lame. I eat a lot of carrots, and walnuts, and stuff like that. It's not fun snacking.

Hill: You're a very healthy snacker.

Gallagher: Yeah.

Hill: This is one of those things where I don't know if you've noticed this in your grocery shopping because I've seen it not just in snacks, although I'm going to mention a snack example, but I've seen this in groceries in general, is that during the pandemic, certain products just disappeared. Like not the whole category, but certain products within that category. So one that, you know Rick Frontera, the chef, and he's got a line of prepared foods and that sort of thing. He's got some sauces, and I noticed that the Whole Foods near my house, I don't know. Just a few months into the pandemic, the medium spice version of that sauce just disappeared. They only have the hot version, the medium one is gone. When it comes to snacks, my indulgence is the Tostitos brand Queso, which is not the greatest queso in the world. There are restaurants locally where you're going to get much better queso. But for me, it hits the spot like, "All right. I don't do this all the time, but when I'm indulging, I'll do this," and it just disappears. I was very excited because earlier in the week, I did a quick run to the grocery store and it was on the shelf. I should have just grabbed all of them, but I didn't want to look like a crazy person.

Gallagher: That's exciting. I hope that your summer is filled with Tostitos branded Queso.

Hill: If my summer is filled with Tostitos brand Queso, then I'm going to gain 20 pounds in no time at all. I hope it's an every now and then indulgence. Maria, thanks for being here. Always great talking to you.

Gallagher: Thanks so much for having me.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery, the show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.