MGM Resorts led consumer discretionary sector in Q2; Lululemon among laggards

The consumer discretionary sector (XLY [https://seekingalpha.com/symbol/XLY]) rose over 6% in the second quarter, lagging the broader markets amid shifting consumer spending trends. Consumer spending revived in June after showing signs of slowing down earlier amid declining confidence and mounting inflation.

“Fears that higher oil prices would slow consumer spending did not play out, driving strong sector performance. Instead, oil prices moderated from highs as the Iran conflict wound down, and a larger tax refund season left consumers flush with cash and able to sustain a healthy pace of spending. With a strengthening labor market, consumers are well positioned to keep spending in the months ahead,” Seeking Alpha analyst Seeking Profits [https://seekingalpha.com/author/seeking-profits] said.

CONSUMER DISCRETIONARY SECTOR SCORECARD

Sector Return: +6.67%

Best Performer: MGM Resorts International (+34.14%)

Worst Performer: Tractor Supply Company (-30.44%)

TOP CONSUMER DISCRETIONARY PERFORMERS OF THE QUARTER

MGM Resorts (MGM [https://seekingalpha.com/symbol/MGM]) showed the best performance in the quarter with shares up over 37%. The company reported a mixed first quarter where it missed earnings estimates. The management sees the momentum continuing in the second quarter. In May, JPMorgan upgraded the firm to an Overweight rating from Neutral on expectations of improving growth. More recently, MGM received a proposal from People Incorporated to acquire all outstanding shares of MGM that it does not already own for $48.30 per share in cash.

Williams-Sonoma (WSM [https://seekingalpha.com/symbol/WSM]) has advanced nearly 37% this quarter. Earlier this month, BofA Securities’ Christopher Nardone maintained his Buy rating on the stock with a $250 price target. The firm reported an improvement in both its top and bottom lines in the first quarter.

“During the quarter, we saw significant M&A activity, especially in the casino sector, and deal chatter drove MGM to being a top performer. Casinos are especially well-positioned to benefit from demand from in-person gatherings and live events while blending in incremental digital revenue from sports betting, online gambling, and growth in prediction markets,” the analyst added.

“Williams Sonoma’s strong performance can be attributed to its focus on higher-income consumers (~$150k+) and those who already own homes. These households have more resilient spending patterns and greater insulation from inflation pressures, leaving WSM able to pass on higher costs and sustain volume growth,” he added.

TOP FIVE GAINERS IN Q2

MGM Resorts International (MGM [https://seekingalpha.com/symbol/MGM]) +34.14%

Williams-Sonoma (WSM [https://seekingalpha.com/symbol/WSM]) +32.11%

eBay (EBAY [https://seekingalpha.com/symbol/EBAY]) +26.20%

DoorDash (DASH [https://seekingalpha.com/symbol/DASH]) +25.20%

Ford (F [https://seekingalpha.com/symbol/F]) +23.42%

TOP CONSUMER DISCRETIONARY DETRACTORS OF THE QUARTER

Tractor Supply (TSCO [https://seekingalpha.com/symbol/TSCO]) declined the most this quarter amid ongoing concerns over pet ownership due to higher pet-related costs. Piper Sandler lowered its rating on the firm to Neutral from Overweight in May. In Q1, Tractor Supply’s comparable sales grew only about 0.5%, missing the consensus estimate of a 1.6% increase.

“While consumer spending has been solid, there remain idiosyncratic challenges. In particular, after booming post-COVID, we have seen pet ownership trends and spending moderate. With many consumer companies increasing exposure since 2020, this has left the segment oversupplied, weighing hard on Tractor Supply as sales decline in pet categories, weighing down overall results. This pressure is likely to linger,” Seeking Profits commented.

Lululemon (LULU [https://seekingalpha.com/symbol/LULU]) lost more than 22% due to weakness in North America amid geopolitical headwinds, while Nike (NKE [https://seekingalpha.com/symbol/NKE]) declined over 20% in the three months from April to June.

“Lululemon has also struggled to maintain brand relevance with consumers as it faces increased competition within the athleisure sector. Consumers are increasingly pivoting spending to upstart brands at the expense of legacy players like Lulu and Athleta. These challenges have also caused boardroom drama, including a settled proxy fight with its founder,” the analyst further noted.

TOP FIVE LOSERS IN Q2

Tractor Supply Company (TSCO [https://seekingalpha.com/symbol/TSCO]) -30.44%

lululemon athletica (LULU [https://seekingalpha.com/symbol/LULU]) -22.30%

Rollins (ROL [https://seekingalpha.com/symbol/ROL]) -21.15%

Nike (NKE [https://seekingalpha.com/symbol/NKE]) -19.50%

Domino's Pizza (DPZ [https://seekingalpha.com/symbol/DPZ]) -16.19%

LOOKING AHEAD

Going ahead, inflation and geopolitical situations across the globe will continue to influence consumer spending trends heavily, which in turn will guide the consumer sector’s performance. Meanwhile, second-quarter prints of consumer discretionary bigwigs Amazon (AMZN [https://seekingalpha.com/symbol/AMZN]) and Starbucks (SBUX [https://seekingalpha.com/symbol/SBUX]), who report their results in July, will also be in the spotlight.

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