America's retailers and restaurants brace for a shock from student loan payments
Target, Ulta among stocks with most exposure to student loan borrowers.
Borrowers aren't the only ones bracing for the impact of student loan payments resuming.
Some of America's biggest retail and food chains have been preparing investors for a slowdown in consumer spending as the more than three-year pause in student loan payments comes to an end.
Student loans, along with other forms of consumer debt, are going to "come into focus in the next month or two," Macy's (M) CFO Adrian Mitchell said on Tuesday. "So we just believe that the customer is coming under pressure because these are new realities that they have to continue to deal with as we get through the back half of this year and move into next year."
A similar warning came this month from the world's largest retailer, Walmart.
"Jobs, wages, and pockets of disinflation are helping our customers. But rising energy prices, resuming student loan payments, higher borrowing costs and tightening lending standards, and a drawdown in excess savings mean that household budgets are still under pressure," Walmart CEO Doug McMillon told Wall Street when the retailer reported earnings.
Federal student loans will begin to accrue interest again on Sept. 1, with payments resuming on Oct. 1.
Read more: Worried about when student loan repayments resume? These programs could help
TransUnion's head of global research and consulting Charlie Wise tells Yahoo Finance that roughly 40 million consumers will face the "payment shock" when student debt relief ends.
Consumers were already having trouble paying off credit card debt, as Macy's warned this week. Now, the return of student loan payments could make financial matters worse, with execs warning that the extra expense may lead consumers to pull back spending in other areas.
Yahoo Finance takes a look at the consumer stocks with the most at risk.
Retailers with most student loan payment exposure
Some retailers appear more vulnerable to repayment shock than others heading into the crucial back-to-school and holiday shopping seasons.
"We are most cautious on brands with high exposure to student debt holders and inferior value perceptions amongst 18-34-year-olds, the most representative demographic of student debt holders," TD Cowen analyst Andrew Charles wrote in a note to clients.
The research team at TD Cowen highlighted Target (TGT) and Ulta (ULTA) as particularly vulnerable, due to their exposure to younger, low-income consumers with student loans.
"The resumption of student loan repayments is one of many factors that we're watching really closely," Target CFO Michael Fiddelke told Yahoo Finance as the retailer slashed its full-year profit outlook.
Other "most-exposed" stocks to younger, lower-income student borrowers, according to TD Cowen analysts, include Academy Sports and Outdoors (ASO), FIGS (FIGS), Foot Locker (FL), Burlington Stores (BURL), and Williams-Sonoma (WSM).
UBS analyst Jay Sole wrote that US student debt borrowers will likely pull back spending on apparel overall since they "prefer brands over private label and specialty retailers over discounters."
This is bad news for American Eagle Outfitters (AEO), Carter's (CRI), Crocs (CROX), Canada Goose (GOOS), The Gap (GPS), Nordstrom (JWN), Nike (NKE), Steven Madden (SHOO), Under Armour (UAA), and Victoria's Secret & Co. (VSCO), Sole said.
Stores with a higher discretionary product mix also face higher risk, according to JPMorgan analyst Christopher Horvers.
That includes Target and Ulta, Horvers noted, as well as Dick's Sporting Goods (DKS) and Best Buy (BBY), followed by Home Depot (HD), Lowe's (LOW), Costco (COST), and Walmart, with the primary difference driven by the former group's higher mix of discretionary product.
On the flip side, auto parts stocks are less at risk "given their lower-income exposure and low discretionary mix," Horvers wrote in a note to investors.
Meanwhile, BJ's Wholesale Club (BJ) "remains a question mark" as its "geo-weighted exposure to student loans ranks it high offset by its largely non-discretionary mix (85% grocery)," Horvers added.
Restaurants watch for sales weakness
When it comes to spending at restaurants, TD Cowen's Charles said he estimates up to "a 2% annual headwind to restaurant industry spending as student loan payments resume."
The team at TD Cowen suggested Jack in the Box (JACK), Dutch Bros (BROS), and Sweetgreen (SG) may face headwinds. Investors should also tread lightly with tobacco and beverage brands, such as Altria Group (MO), British American Tobacco (BATS), and Monster Beverage (MNST).
Even higher-end plays in the restaurant space aren't immune.
Cava — where a salad bowl can set one back $14 — expressed caution on the consumer outlook in its latest earnings.
CEO Brett Schulman told Yahoo Finance that student loan payments restarting was one of the "multitude of factors" up against consumers, along with higher gas prices, costly utility bills, and a "hawkish Fed."
"So we're mindful of those pressures," Schulman said. "We saw a resilient consumer in Q2, but we'd be remiss if we didn't take those considerations into account."
Of course, not all borrowers will have to pay right away.
Those still in school remain "in the regular forbearance period," TransUnion's Wise points out. "But we think that about 26 million-27 million consumers will be facing the beginning or resumption of payments in the next couple of weeks."
There's another catch: The Department of Education is instituting a 12-month "on-ramp" for repayment from Oct. 1, 2023 to Sept. 30, 2024. Though interest will accrue during this period, financially vulnerable borrowers who miss monthly payments won't be considered delinquent or reported to credit bureaus and debt collectors.
Cowen's Charles said in a note to clients this "likely pushes any major impact to spending to late next year."
Are you an American with student loan debt or a company nervous about the return of student loan payments? Drop a note to [email protected].
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