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Research and Market Commentary

Global Markets Insights: Big retailers win, US election looms, housing red hot

August 21, 2020

 

Spending heavily on online operations paid off for giant retailers Walmart, Target, Home Depot and Lowes, with all four reporting strong Q2 results. The back-to-school season may be less than usual, though, with the decision to have children back in class still up in the air. Meanwhile, with the US elections less than three months away, equity investors are weighing the effects of a Democratic victory versus a second mandate for Trump. Canada’s home sales continue to see solid gains, with unit sales and new listings surpassing pre-pandemic levels. That pace may be dampened by more stringent mortgage borrowing conditions introduced July 1, but there are no signs of that yet.


Scotiabank analysts and economists weigh in on what the pandemic means for retail, equities and housing.

 

Retail

  • Walmart, Target, Home Depot and Lowes released second-quarter earnings this week, and in each case the overall results exceeded expectations, driven by strong sales trends that reflected the impact of the pandemic on consumers’ shopping behaviours. Each of these retailers has spent heavily on online operations, leaving them well positioned to thrive in the current context.

  • Target reported its largest sales surge in 58 years, with same-store sales (SSS) rising 24%. The company said it gained approximately $5B in market share in the quarter. Strong categories included electronics +70%, home +30%, food and essentials +20%. Online sales almost tripled for Target in Q2.

  • Walmart’s SSS in Q2 rose 9.3%, reflecting a 27% boost to average basket and a 14% decline in traffic. Margins expanded, reflecting a mix shift to higher-margin merchandise categories, fewer markdowns and better fuel margins. E-commerce sales growth accelerated in Q2 to +97% y/y (+74% in Q1). Walmart Canada trends were even stronger, with SSS rising 14% on a 38.9% higher basket and an 18% decline in traffic. E-commerce sales rose 215%. Interestingly, Walmart US saw sales begin to normalize past the end of Q2, likely reflecting stimulus funds tapering off.

  • In the case of Home Depot and Lowes, where Q2 SSS grew 23.4% and 35.1%, respectively, the companies are benefiting from a surge in DIY activity as consumers spend more time at home and are diverting travel and vacation funds to home improvement projects. They are also gaining market share at the expense of smaller competitors, again pointing to a widening gap in retail performance. Online sales at Home Depot doubled in Q2, while online sales at Lowes more than doubled, up 135%. 

  • Back-to-school 2020 is proving to be like no other as parents and officials grapple with whether to send children back to class and young people to college, decisions that will determine where consumers spend. A new backpack and back-to-school clothes won’t be necessary if your child will be learning online. All this has meant retailers have had to plan differently and be very flexible with respect to assortment and merchandising. Target CEO Brian Cornell summed up the situation well on the earnings call: “Two thirds of US students were due to begin school remotely. Sitting here today, I don’t know if 30 days from now that number is going to be 6% or 96%.”  

  • The pandemic has devastated retail, and the gap between winners and losers continues to widen. This is all too evident in the Q2 results delivered this week by these four big retailers. We expect as we move further through 2020 and into 2021, the great retail divide will only be more acute.
     

—  Patricia Baker, Director, Retailing, Global Equity Research


Equities

  • With less than three months to go before the US election and Joe Biden leading in national polls, investors are wondering what a Democrat victory would mean for equities. Our key takeaways are as follows:

  • We see much higher economic and tax policy uncertainty under a Democrat agenda. With the S&P 500 hovering near an all-time high, no doubt a Democratic sweep (winning the House, Senate and White House) is not accounted for by investors. We would expect a heavy dose of volatility if it were to happen. Still, weakness should prove temporary as stocks will continue to benefit from extremely accommodative monetary policy for the next couple of years (and the Fed could be even more dovish if fiscal policy were to become restrictive).

  • Trump winning a second mandate is not risk-free either as trade tensions (with partners and foes alike) could remain elevated. The ink is barely dry on the new USMCA agreement and he has already slapped new tariffs on Canadian aluminum. Europe could be next. Nonetheless, we believe his economic/tax agenda is more investor-friendly.

  • Hope for no major technical glitches on Election Day. Election results being delayed or having to proceed to a recount of the votes in some swing states could lead to a messy situation, especially if a party refuses to accept the results. Remember the mess in Iowa when Democrats were unable to release the results of their Presidential caucuses for several days. If it were to happen in November, stand ready for some volatility/weakness in US equities.

  • Whoever wins the White House, a divided Congress could be the best outcome.
     

 —  Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity

Research

 

Housing

  • Home sales activity surged again in another sign of Canada’s buoyant ongoing rebound from COVID-19 lockdowns. With re-openings continuing across the country, new listings registered their strongest-ever month of July in 2020, while existing home sales reached their highest level in any month in recorded history. On a m/m seasonally adjusted basis, Canadian home purchases rose 26%, while new listings climbed a healthy 7.6%. That pushed the national sales-to-new-listings ratio to 73.9% (sa) — the highest since 2002 and consistent with demand-supply conditions strongly tilted in favour of sellers. Consequently, the composite MLS Home Price Index rose 7.4% (nsa y/y) — the strongest gain since 2017.

  • Canada’s largest centres tended to witness the steepest sales increases. Purchase volumes were up more than 40% in both Toronto and Vancouver, with Montreal registering a 39% advance (all sa m/m). Ottawa, a number of cities in Southern BC, and Ontario’s Greater Golden Horseshoe region also enjoyed strong sales gains. Purchases were up across municipalities in Saskatchewan and Alberta as well, albeit at a more moderate pace.

  • Solid gains were expected as most regions entered the final stage of reopening in July and following early releases from local real estate boards, but the strength of the rebound continues to surprise. Nationally, both unit sales and new listings have surpassed pre-virus levels, with purchases now a hefty 17% higher than five months ago. That strength, coincident with a labour market yet to return to its pre-pandemic vibrancy, suggests some pent-up demand remains that could continue to be released in the coming months, even as the pace of reopening eases. The effects of more stringent mortgage borrowing conditions introduced by the CMHC on July 1 may eventually dampen mortgage demand, although there is little evidence of that to date.
     

To read the full Housing News Flash from Scotiabank Economics, click here.
 

—  Marc Desormeaux, Senior Economist; Alena Bystrova, Senior Economic Analyst

 

For Scotiabank, Global Banking and Markets Research Analyst Standards and Disclosure Policies, please visit www.gbm.scotiabank.com/disclosures.

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