2025 ICR Conference

Consumer Updates

We continue to believe the consumer is in strong shape. The consumer is 75% of U.S. GDP and as the labor market remains strong, wages are elevated, and inflation continues to progress lower. We remain opportunistic and overweight the sector.

The 27^th annual ICR Conference took place earlier this week, bringing together 200+ public and private companies, 40+ investment banks, and over 150 research firms to the biggest consumer conference of the year. Top companies at the conference this year included Walmart (WMT), ON (ONON), Shake Shack (SHAK), and several others. The consumer is one of our favorite long-term themes and a big part of our thesis of continued economic resilience.

Last Friday’s wage data continued to point toward a healthy consumer. Wages grew nearly 4% y/y along with 223K new jobs created and a declining unemployment rate. We also continue to see inflation coming in lower and heading toward the Fed’s 2% goal. This week, the Producer Price Index (PPI) for December came in at 0.2% m/m and 3.3% y/y, both lower than the expectations for 0.4% m/m and 3.5% y/y. Compared to November, energy prices rose, while good prices fell, and service costs were unchanged. The Consumer Price Index (CPI) also came in at and below expectations, with the headline printing 2.9% y/y (meeting expectations) and core CPI 3.2% y/y (versus 3.3% y/y consensus). Energy accounted for over 40% of the monthly all-items increase, and the 12-month core reading declined m/m for the first time since July. Importantly, shelter has been one of the largest components of sustained levels of inflation. Last month, the shelter index rose 4.6% y/y, making it the smallest 12-month increase since January 2022.

Chart 1: Although Still Above the Fed’s Target, Inflation is Looking More Like Pre-Pandemic Readings^[1]

The companies at the ICR Conference this week provided further insight into the state of the consumer – keeping us hopeful about the outlook for consumer activity. Lululemon (LULU) released updated financial data ahead of the conference which showed the company is expecting fourth-quarter earnings growth of 11-12% y/y and gross margin expansion of 30 basis points (bps). LULU previously expected a gross margin decline of 20-30 bps, so switching its outlook to gross margin expansion is a positive sign. Additionally, a solid holiday season was part of the reason why the company raised fourth quarter guidance.

American Eagle (AEO) and Urban Outfitters (URBN) shared that they have witnessed stronger-than-expected sales over the last few months. Abercrombie & Fitch (ANF) reported better-than-expected holiday sales and raised fourth quarter guidance, but the company did not increase its expected operating margin, which disappointed investors. Macy’s (M) reduced its earnings outlook and said they “see a consumer that, although remains choiceful and looking for value, is interested in shopping”. ON did not pre-announce fourth quarter results, but management reiterated its positive holiday tone, expressed confidence in its 2025 set-up, and remains on track to achieve its 2026 sales target of $3.55 billion.

Moving to the restaurant industry, SHAK reported better-than-expected fourth quarter results with same-store sales growth of +3%. Importantly, the company increased its new long term total addressable market to 1,500+ company-operated stores in North America (versus 450 when the company went public). Darden Restaurants (DRI) mentioned that consumer preferences continue to focus on relative value. Restaurants under DRI such as Olive Garden and Longhorn Steakhouse continue to perform well.

WMT was the highlight of day two, but the company did not present many big takeaways. Their presentation was focused on Walmart Connect – the company’s retail media platform that helps brands reach Walmart customers through a variety of channels. Walmart has the ability to precisely target its ads given its vast amount of data; the company sees 145 million shoppers each week, and given its Vizio acquisition, it can now better target TV ads. Also on the social media side, WMT has connections with Disney and TikTok.

Over the last two quarters, we have learned across many instances how WMT is implementing artificial intelligence and new technologies to increase efficiency. In the second quarter of 2024, WMT stated it utilized large language models to create and improve over 850 million pieces of data in its catalog. Management said these efforts would have required 100 times the current headcount to be completed manually. WMT, along with other consumer-focused companies, is relying more than ever on customer data to drive retention, sales, and growth.

The overall commentary from many retail-exposure consumer brands this week has remained upbeat and is in line with our belief of a strong consumer base. Many companies witnessed improved sales throughout the holiday season and maintained or increased guidance going forward. In our opinion, the American consumer remains supported by an expanding economy, a solid labor market, near 4% wage growth, and declining inflation. As long as the economy remains solid (which we believe it will), the consumer will remain in a good position.

Stephanie Link’s TV Schedule:

Sources:

^[1] Source: Bloomberg. As of January 15, 2025.

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