Lori Calvasina 00:03
Welcome to the latest edition of RBC’s Markets In Motion podcast, recorded March 28, 2025. I'm Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers. So today, we're bringing you a special edition of the podcast which is going to run a little bit longer than our usual five to seven minute format. I'm here today with three of my colleagues in equity research at RBC Capital Markets who specialize in the consumer space. As the first quarter of 2025 comes to a close, we've gathered together today to discuss whether it's crunch time for the US consumer, and more specifically, what they've been seeing in their industry data and company commentary that can give us some insight into the state of the US consumer this year, particularly over the last few months and weeks, and where they see the consumer going forward. So with that, let me introduce our panel. I'm joined by Nick Modi. Nick is a managing director and global co-head of consumer and retail research at RBC, and leads coverage for US beverage, packaged food, household and personal care and beauty industries. Mike Dahl is a managing director and covers the US home builders and building products industries. And Steve Shemesh is a director and covers the US hard line and broad line and food retail industries. So first off, guys, a big thank you today for joining me. I know you've all been on the road, seeing investors and busy with earnings these past few weeks. And honestly, everyone these days seems to be absolutely obsessed with what's going on with the US consumer so I'm guessing you've been pretty busy on the phone and email as well. I want to start out with the big picture, the consumer surveys, the so called ‘soft data,’ have been getting hit very, very hard, but it's hard to say how that's reverberating and the hard economic or macro data just yet. And so when you think about your companies and industry specific data points for the last few weeks and months. What are you seeing? What is it telling you about the state of the consumer right now? Nick, as global co-head, let's go ahead and start with you and set the stage.
Nik Modi 02:01
Yeah, thanks, Lori, and thanks for having me on this podcast. Look, the data points have been very, very clear, and they skew negative, right? So you know, we've been quite cautious on the consumer. And when you're dealing with companies that sell everyday goods, you know, you tend to pick up a lot more data points, right? Because obviously people are coming in the stores and buying toothpaste and food and beverages, you know, on a weekly basis. And so we track a lot of data, and we recently attended the consumer analyst group of New York Conference. Now this is the largest consumer largest consumer staples conference where you have every major large cap consumer staples management team come and present. You have 1000s of investors. And I've been going to this conference for about 25 years, as long as I've been covering this industry. And this had to be the most downbeat Cagney I've ever attended, and that goes over multiple economic cycles, right? So it's very clear that the companies that I cover are seeing real weakness. We've been noticing trade down to private label. We've been noticing trade down to smaller pack sizes. Clearly, since the Trump administration has come into office and has started laying out some of their agenda. Some of the immigration concerns have been popping up in consumption data, especially in those very high Hispanic-Latino markets. We're seeing clear evidence of weakness there. So we're seeing weakness across the board. Last quarter, when the companies reported, many of them provided guidance below their normalized algorithms for 2025 and you know, it seems like things have actually gotten worse since they last reported or presented to the street.
Lori Calvasina 03:34
All right, Mike, I want to go over to you next. People are always asking me about housing in my meetings, and really view it as an important barometer for the health of the consumer. I know, in addition to some earnings recently, you also spend a lot of time with our data science team crunching some alternative data sets. So what are you seeing in your world?
Mike Dahl 03:50
Yeah, sure. And again, thanks for having me on as well. I I'd really echo a lot of what Nick's saying there. I see this talk about the soft data versus the hard data. I feel like we've been seeing hard data in housing for a little while now, and now, keep in mind, housing has gone through its own affordability crisis the last couple of years, but coming into this year, it feels different. So as we went through January and February, and really February in particular, you could really start to see and sense a shift in tone from management teams, and you've subsequently gotten some of the data from either late reporters or off calendar reporters, where for the builders, volumes have weakened quite a bit. Or even relative to where we already were, and similarly, on margins the builders were already incentivizing for pretty heavily the last couple of years, and that's taken another step in terms of, you know, incremental incentives that have had to be layered in as we've gone through the start of spring. And keep in mind, this is normally a time of year where our industry is kind of biased to be positive, right? We're right in the heart of the biggest part of the selling season. And you normally hear a lot of optimism. You'd normally see companies trying to hold the line or push price higher, and instead, it's become fairly downbeat. And you mentioned some of the work we do with RBC Elements. We do a really unique pricing data set specific to new home builders. And what we really saw in February was a step lower in pricing. And again, this is atypical for this time of year. And so a couple things we're flagging is really just it stands out in the history of our data. We've been doing this for six years now, and this is the worst February we saw across every pricing metric, breadth of price increases, breadth of price reductions, magnitude of price change, sequential price change from a January to a February. So for this time of year, it was notably bad. And that tells us, really, and the companies are kind of echoing this, that in addition to our housing affordability problems, the consumer dynamic and is really driving kind of a different level of engagement or disengagement from housing at this point, right?
Lori Calvasina 06:15
That's super helpful. And Steve, let's shift it over to you just on the big picture, consumer health, anything else you want to add from your space?
Steven Shemesh 06:23
Yeah, thanks, Lori. Our views aren't all too dissimilar from, from Nick or Mike's. I mean, you look across our space, and we cover a lot of different verticals within the retail space, everything from food, retail, auto part services, home improvement, home furnishing. So we get a good look at all of the different end markets. And there's really no denying that the consumer has slowed. Nearly every company in our coverage universe spoke to a deceleration from 4Q to 1Q I think the big question that everyone you know us as analysts or investors are grappling with right now is, ‘What's the reason for that?’ You know, there's, there's a bunch of theories out there. So it could be that your spending was a little bit more weighted towards the Christmas season, and you have a little bit of a spending hangover trying to build back that savings. Thereafter, we had some weather shifts. So the big winter storms hit in January last year versus February this year. So you had pretty easy compares, and maybe sales were a little inflated in January, and then a little bit weaker this February. We had a tougher flu season, year over year. So that may be reduced some traffic. I think the big question people are asking is, you know, we're past a lot of these items. The data hasn't gotten much better yet. Why is that? And part of the reason could be that, you know, Easter is much later last year. That, in theory, should get better into April as you get into some better weather and the compares get a little easier around the seasonal so I think that's what you know. For us, we're paying close attention to the credit card data and consumer spending as we roll into April for a good barometer of what the industry looks like.
Lori Calvasina 07:53
Thanks. That's helpful, and I want to throw this out to each of you. And Mike will probably start with you on this one. One question that investors I've been meeting with have been debating is whether the consumer is really retreating here or just shifting what they're spending their money on. So, you know, retreat or shift? Mike, what's your take on that?
Mike Dahl 08:11
Yeah, I mean, you know, I live in my own little world of housing. So you know, what I can say is kind of people have been trying to figure out how to stretch budgets to make the housing affordability math work for a while now, and it does feel like we've kind of thinned out the pool of available buyers that are willing and able to transact around current levels. But you know, again, going back to the commentary we've heard and the numbers we've seen from some of the builders, most recently, you know, the builders are really talking about a consumer that has pulled back and it being harder to access the income the incremental buyer. You're incentivizing more than you were, and you're still not necessarily getting the volume response that you would expect. And some of the builders are saying that more clearly than others. Maybe there's a little bit mixed message on on the elasticity factor, for us, it feels like it's, it's more a retreat than a than a shift.
Lori Calvasina 09:11
All right. That's great perspective. Steve, what about you? What's your take?
Steven Shemesh 09:13
Yeah, I mean, it's a tough question to answer when we're still trying to figure out if this is, you know, kind of noise related, or understanding the magnitude of how much the consumer has slowed down. I'd say it's probably a little bit of both, but I would, I would lean towards the consumer retreating. I mean, if we think about the economic data, it's trending in the wrong direction, but it's not overly alarming in the grand scheme of things. If you think about personal savings levels, unemployment, debt delinquencies, we follow the year over year change in real average hourly earnings. That's historically been a pretty good leading indicator for PCE, and that's largely held in. So, you know, there's some concerning data points. Things are trending in the wrong direction, but it's not, you know, a screaming signal just yet. I also think, you know, if we think about goods versus services, we've been kind of playing this out for the last couple years at this point where you had an overabundance of goods purchases post pandemic, we've largely gotten back to pre-pandemic levels now if you think about goods versus services, but I don't know if that's a reason to think we stop here. I mean, I think the environment has definitely changed. We have more technology. You think about a company like, you know, DoorDash, and that has kind of changed the game in terms of thinking about food at home versus food away from home. Now you could have food away from home at home, and that's a service, right? So, you know, I don't think it's, it's crazy to think that services might continue to grow as a percentage of overall PCE.
Lori Calvasina 10:39
Okay? And then Nick back over to you,
Nik Modi 10:41
Yeah. I think it's an important to understand that when we talk about the consumer, we're really not talking about one thing, right? It's many things. We can simplify it and say, All right, let's look at low income, middle income, high income, right? And so what really got us to be quite negative on the consumer, even going back about a year and a half, it was, we're seeing very clear manifestation of weakness at the lower end of the income cohort, right? And that has persisted. Now we're starting to see that bleed into middle income, right? And now we're starting to see it kind of bleed into higher income. And I think that's maybe what is tipping over some of the commentary from a lot of these companies, is that they're seeing it broad based, right? So when I look at my coverage, consumer staples, it is very clear that consumers are retreating and shifting, right? Now, the one other thing I'll add, you know, is, the economic data tends to be very backward looking, right? You know, because it's reported, and then we get it a few weeks later, sometimes it gets restated. But there's always a psychological effect to the data itself. So for instance, if unemployment is low, you know, taking up but not so alarmingly. But then where everyone is seeing all these headlines of job losses from DOGE and the uncertainty and the M&A pipelines and all this kind of stuff that we hear in the news. You may still have a job, but you're seeing all this negative news, it's going to start filtering into your to your consumption psychology and your consumption behavior. And so there's a psychological multiplier that I think is happening right now, which is why things are starting to move. It's not that the data, you know, perhaps these are leading indicators of the data to come. I guess is the way to think about it.
Lori Calvasina 12:18
Now, that's great color, and that's actually where I was going to go next were the cohorts and the high income consumers. Because I know that I've been as a generalist, alarmed when I've looked at, you know, the Michigan data in particular on consumer sentiment, and just seeing how far that top income consumer sentiment has really fallen off after, you know, sort. A year, year and a half of hearing the high end consumer strength was bailing out the low end weakness, and that was really filtering into the economic stats. Steve, anything you want to add?
Steve Shemesh 12:46
Sure. I'll start off by saying, I mean, we cover retailers that mostly sell everyday goods. It's not luxury. So we don't over index to the high income consumer in a big way. I think you're starting to see cracks. I think that the data points are far and few in between in our coverage universe, but it's something that we're definitely watching closely. I mean, you've had some data points out there, like the more value oriented names, let's say, a Walmart or an Ali's Bargain Outlet, have been calling out that high income households are trading into their name. That's, however, been something that they've been talking about for a little while now. It wasn't necessarily something that came about 4Q to 1Q so, wouldn't necessarily explain the weakness in 1Q to date. You've had more premium oriented names, so call it like a Sprouts Farmers Market, a William Sonoma and Our House haven't really been talking much about a meaningful change in that high income consumer behavior. Guidance has generally been pretty constructive, at least relative to the rest of the space for 1Q queue. So you know, definitely want to take into account that they're maybe not incentivized to be talking about a high income consumer slowdown. Lululemon comments last night on slower traffic, not a fantastic read. We have RH reporting next week, which I think will be important to understand that high income consumer, and as Nick mentioned before, I think there is a psychological aspect to this as well of you know, the stock market hasn't done well, and that's affected the numbers that people are looking at every day in their 401ks and personal accounts. So if that's what you're looking at, that certainly is has the potential to make a consumer, even if you are high income and your personal balance sheet looks okay, spend a little bit differently.
Lori Calvasina 14:24
All right, that's super helpful. And then Mike, let's switch back over to you. I mean, I think home builders are always fascinating, because you do get all these different slices. In addition to sort of the income dynamics. Are you seeing anything interesting regionally going on in your world right now?
Mike Dahl 14:37
Yeah, I think we're seeing some notable things. And, and look, I think, you know, Steve’s right, I don't want to make this out to be that we are seeing things crater here. But to Nick's point, it feels like there's kind of, there is a little bit of a culmination in certain things that's starting to filter through in a little bit more broad of a way. And so if I go back to our pricing data, for example, generally speaking, we are able to stratify the pricing data by price point, and generally speaking, we have been seeing the higher priced parts of the market hold up better than the lower end of the market, and that's been true for a while. It was not true in February, we saw the weakness spread up the price curve, and so price declines at the high end, or price changes at the high end, were as weak as the low in the midpoint, and on some of the metrics, the high end was actually even a little bit weaker on certain pricing trends than the lower and middle price point. So that was notable to us. And then in terms of geographic breath, in a couple of the prior months, you know, when we look at, call it the top 40 markets, everyone's been very focused in housing, on areas like Florida or Texas, where there was a lot of construction, a lot of run up at price, a lot of inventory build, and now you're seeing some outsized pressures. What we've observed again over the past month or so is that that has broadened. In January, for example, eight of the top 40 markets on net price declines in our work. In February that rose to 18 of the top 40 markets. And it spread out throughout, really the Sun Belt, where the builders are most heavily concentrated. A lot of those Sun Belt markets on that declined in February. So those are the types of data points that, you know, we don't want to necessarily go seeking out to justify a thesis, but when we see them, we have to take note.
Lori Calvasina 16:45
That's super helpful. And I want to switch gears just a little bit. As we're recording this, April 2 is just a few days away, and that's when many equity investors are hoping they're going to get more clarity on where tariffs are headed. So I wanted to ask each of you, what are you thinking about in terms of tariffs, in terms of how your companies are going to manage around that, what's baked into guidance and how that affects supply chains and just various indicators you know that speak to the profitability of your industry and companies, and let's see, Mike, we'll start with you. I've got you in the hot seat, so we'll keep you there.
Mike Dahl 17:16
Great. Look, I think as much as housing tends to be a fairly domestic industry, there's still a couple of pockets that are pretty obvious in terms of exposures to tariffs, namely, wood based products, about 30% of lumber and OSB used in the US comes from Canada. And that would represent, call it five to 7% of the selling price of an average new house. So simplistically, you know, if we think about that in a standalone basis, if we see 10 or 20% increases in wood products, you're talking about builders having to absorb 50 to 100 basis points of cost in an environment where there's no net pricing power, net negative pricing power. So we would think that would be a challenge. A lot of the other building products companies or supplies, you know, maybe at least partially produced domestically, but there are certain categories, whether it's plumbing or appliances, where there's either a finished goods component being imported or a component supply chain that that is foreign based. So there are going to be some, some derivative impacts for the builders, some direct impacts for the building products company. And it's going to require some level price pass through, which it is unclear. Historically, we've had cost based pricing power in many of the building products categories, but in this type of demand environment, is unclear how successful some of those trends will be. And Steve covers the home centers, he can probably speak to how they're going to approach price with respect to a lot of things that that I deal with, but it's going to be a bit of a tricky environment to navigate through when we're this affordability constrained and already seeing the type of demand and price trends out there.
Lori Calvasina 19:06
And then Steve, that's a good segue. Over to you on tariffs.
Steve Shemesh 19:09
Yeah. I mean, I think, you know, this is kind of the swing factor here. You might think the consumer is worsening, but tariffs have the potential to be the straw that broke the camel's back. It's really hard to imagine that tariffs don't result in higher consumer prices. Again, we cover a lot of different verticals, and people are handling them different ways, depending on what their sourcing and supply chains look like. Most are talking about sharing incremental costs with suppliers, diversifying or sourcing, and then lastly, passing cost on onto consumer. Consumers, and a lot of them, are drawing parallels back to 2019 which, I'm just having a hard time with, because we're in a much different environment today than we were back then, and the consumer is much more fragile. So if we start putting through incremental pricing, you know, I think we're going to have much bigger elasticity than we were before. And not to mention, you know, most of our companies neglected or chose not to include any tariff impact in their guidance. So from both a consumer standpoint and a supplier standpoint, we're sitting with a lot of uncertainty right now. We don't know what the end state is going to look like in tariffs. So if you’re a supplier, you know you're not sure what your inventory or demand is going to look like, and how that may compare to people who are, you know, shipping from other locations around the world. As a consumer, you know, you don't know what the macro is going to look like, so lot of uncertainty. I think we'll get to a point where we know what peak tariffs look like, and then, you know, us as analysts or investors are going to have to go back through all of our models and try to understand what the earnings impact would be, which is going to be probably a tough exercise for a lot of our names. And in our space, again, there's, there's different markets and different sensitivities to price and elasticity. So you're going to have some relative winners, like, like auto parts, who typically are able to just pass on pricing, and, you know, it's a needs based category, so you're not going to be affected by volume. And then, you know, the losers would probably be the general merchandise and home furnishings.
Lori Calvasina 21:13
That's great. That's great context. And Nick your thoughts on that, yeah?
Nik Modi 21:16
Especially from an elasticity standpoint, I'm not sure that my companies are going to be able to really pass along. I mean, they took a lot of pricing since 2020 I mean, a lot, and so it's a real issue. And to Steve's point, I mean, my companies haven't provided tariff perspective and their guidance either. Lori, like you and I have had this chat so many times over the years. You know, on your underweight as relates to consumer staples. I mean, you know, the reality is, this sector should be performing a lot better in this kind of environment, but because there's earnings pressure, you know, investors are finding other areas to park their money, and this is one of my big issues. I mean, I've been pretty critical of my sector because they've not provided the kind of visibility that investors require. That's why the premiums have basically collapsed, right? I mean, this sector used to trade at a pretty nice premium relative to the market, and now it trades at a discount. So you know, it's going to be a rough sledding this year for my space, for sure.
Mike Dahl 22:11
Lori, I just want to echo before we move on, same thing, because it's an important point that I touch on our companies, likewise, did not include anything other than the initial 10% tariffs on China in their guides. It makes for an incredibly difficult upcoming earnings season where investors, analysts, we all, if these tariffs stay in places, we sit here in three or four weeks, we all know that, and we don't have visibility on exactly how that's going to manifest in numbers from a timing or order of magnitude standpoint, but some level of incremental tariffs has to get factored in in here, and that's just going to make for a tricky setup.
Lori Calvasina 22:53
You all made me feel a lot better by saying that, because, as I've been reading through, you know, transcripts and, you know, from conferences and earnings calls and whatever else I can get my hands on, I've been sort of mystified at the conversation on tariffs, not just with consumer companies, but even industrial companies. And even back in November, when broad based tariffs were being discussed, all I saw was China discussions and how 2018 and 2019 were managed around. And there's been so little discussion of Canada or Mexico recently, you know, I get questions about this in the big picture, and I'm in the same seat you are saying, ‘We're just not getting a lot of color from companies. It makes it very, very difficult to handicap, but we know it has to be dealt with in the forecasts. Steve said earlier, you know, the debate of just like, what is it exactly that's pressuring the consumer? I mean, you know if I put my list together, it's been interest rates, inflation, affordability, confidence, weather, the flu, you know, and I've probably left 20 things out, you know. But Nick, what's your sense? What's your gut feel like, if you just could narrow it down to like, one or two issues, what do you think is the big problem for the consumer right now? Or is it just everything?
Nik Modi 23:58
I mean, look, it is everything. But the incrementals right are the weight of inflation building at a time where consumers seem to be over levered, particularly the lower and middle income consumers, right? So that's, that's kind of point number one. And then the second point is, obviously, as relates to one of the fastest growing demographics, right, Hispanic and Latino consumers feeling a bit scared, quite frankly, in terms of consumption behavior. You know, like you might have a few folks going to, that were going to bars or bodegas to pick up a single serve, that aren't going now because they're afraid they're gonna, you know, get approached by someone, right? And then the third thing is this the psychological thing that we talked about with all the negative headlines around job loss, right? And I think that is also getting into the psyche. So to me, those are the things that are incremental in 2025 that I think are driving some of the weakness in Feb and March.
Lori Calvasina24:55
That's super helpful. And then Steve will throw it to you. I mean, in your world, what? What's kind of the biggest one or two issues?
Speaker 1 25:01
Yeah. I mean, I think, I think Nick nailed it with, with those three points. I would add on top of that, is just like a feeling of uncertainty. I mean, we don't know what the next six months is going to look like. And really we just need to understand, or at least have some clarity on what tariffs look like, because that's going to be pretty meaningful for what the economy is going to, you know, what direction we're going to move in. So I think getting there, and at least having clarity will allow people to behave a little bit more normally, for better or for worse.
Lori Calvasina 25:29
All right. And Mike, in your world, if you could wave a magic wand and fix one thing for the consumer or two things, what would it be?
Mike Dahl 25:35
Yeah, I mean, I'll cheat and say interest rates, inflation and affordability are all kind of one thing, and that's been weighing on housing for a couple of years now. So, the uncertainty, all that at least at a minimum, driving a change in urgency as the consumer approaches or thinks about housing, it's hard to figure out how that'll come back. It's very hard to make to wave the wand and fix affordability. We know it's going to be hard to fix that. We don't know how hard or easy it will be to change kind of the confidence dynamic and the urgency dynamic
Lori Calvasina 26:13
All right, so let's, let's wrap up here with just basically, what have I missed? Is there anything that we didn't talk about today on the consumer that you think is really important for people to pay attention to right now, and if not that, any big question on your mind that you're hoping you get the answer to in the next few weeks, anything that's worrying you or making you feel a bit better. You can pick any one of those questions. And Nick, we'll start with you.
Nik Modi 26:36
Yeah. I mean, I think at least for my sector, right visibility and is the most important thing in terms of how these stocks behave. And so what I'm really looking for is just when our company is going to finally come around to the fact that we are living in much more volatile times than I think they have been accustomed to. And when will they clean sweep their numbers so investors can say, all right, well, I feel like downward revisions are done with. Let's get on with it. And these stocks look cheap on a relative basis, right? Like that's what I'm waiting for, and I've been advocating my coverage universe, and the companies in the universe do that, but they haven't been doing it. You know, it's been this kind of death by 1000 cut. So that's really what I'm looking for. And really like, it's like timing. Like when, when are we going to actually see the bottom right? And I argued that that would have come sometime later in 2025. When I did my Outlook, I said, ‘Look, by the time we get to the third quarter, wage growth will have caught up to grocery inflation, going index back to 2019 - all else being equal.’ Well, unfortunately, all else is not equal, right? We had now another disruptive force that I think is going to prolong the recovery, maybe even into 2026. But that's really what I'm looking for. I'm looking for the companies to finally say, ‘Hey, let's take our numbers to where we feel like we can deliver it, even if we have some incremental pressure on the consumer.’ So then investors can feel like, ‘Okay, we're at the bottom of the revision cycle,’ which is really what they're looking for.
Lori Calvasina28:06
Steve, you next?
Steve Shemesh 28:07
I guess the two things that we're focused on. One super near term, just transaction data across the space. As we roll into April again, weather should start to break, we’ll be past the flu season for the most part. And the timing, the noise around Easter timing, will have kind of been made up for. So that'll be first just to understand, is there something bigger going on than just noise? And then secondly, just clarity on, on what endgame for tariffs looks like. Once we understand that, then we can go back through all of the models and understand, or at least get a rough sense, of where the baseline is for earnings. And then we can start to build back there on top of that. And then, you know, the big question would be, are we just in a slower growth environment for longer, in which case consumer discretionary probably doesn't look fantastic.
Lori Calvasina 28:58
All right, Mike, I'll give you the last word.
Mike Dahl 29:00
I think at the end of the day, we need to just be maniacal about every single data point we can get our hands on that tells us anything about the current consumer dynamic. How much is a passing growth scare versus something worse? And I've used Nick's phrase of death by 1000 cuts virtually every marketing meeting or call, because that's how my space treats numbers, and that's not helpful from a stock setup. But the real downside scenario is still just if the consumer is actually tipping over, then it doesn't matter if we cleanse numbers or setups a little, a little bit, this is not going to be a good outcome. So we need to, we need to just understand what's happening there, and anything we can, we can see that helps us build that mosaic.
Lori Calvasina 29:54
All right. Well, this is, this has been amazingly helpful to me, and I hope to all of our listeners. I want to give a huge thank you again to all three of you for your time today. I know how busy you have been recently, so I'm very grateful we were all able to do this, and with that, we will sign off.