Retail sales report – have consumers stopped spending?
This past week, we had a number of flagship retailers report earnings which, to be polite, underwhelmed the hot money folks on Wall Street.
For instance, Macy’s (M) cut its full-year sales and profit forecasts, along with a drop in same store sales. That got the stock sold off to its lowest level since 2008. Nordstrom (JWN) reported their quarterly earnings well below expectations, resulting in a double-digit percentage drop in its shares. Even JC Penney (JCP), which had said it was “pleased” with its quarterly report, saw its shares get drilled last week. (This week, Urban Outfitters (URBN), Abercrombie & Fitch (ANF), and TJX (TJX) are all set to report earnings.)
And then last Friday, the Commerce Department reinforced the worriers when October retail sales came in at up 0.1%, as opposed to the gain of 0.4% the consensus expected. (By the way, the number was held back to an extent by a 0.9% drop in service station sales due to the lower cost of fuel.) The NBC News folks headlined a “Worrying retail sales report…” Really?
How do you then explain Amazon.com (AMZN)? They’re definitely in retail. And yet, during this same week, their stock hit a new all-time high, dating from its initial public offering in 1997. Additionally, it was added to the Thomson Reuters global innovators list for 2015. What’s up?
In my mind, we have a couple things going on here. One is how we think of consumer spending and the other is a change in trend – something retailers of all types have to deal with daily.
First, it’s not all about clothes
While shopping for clothes is kind of the default mental image for most of us regarding consumer spending, that’s a long way from what that really covers.
Report from Deutsche Bank pointed out that “clothing and footwear only make up 3% of consumer spending. Services make up 67% of consumer spending.”
Proof of that comes from the top 10 stocks in the S&P500, in terms of their respective year-to-date (YTD) stock price performance. These are all in some sort of consumer-spending related business. They are, ranked from highest to lowest YTD price performance, Netflix (NFLX), Amazon.com (AMZN), Starbucks (SBUX), Google (GOOG), O’Reilly Automotive (ORLY), Nike (NKE), Facebook (FB) and Home Depot (HD). Only NKE is really in the clothes business, per se – all the rest are services of some sort.
Some base line data
Let’s agree that retail, of any sort, is a tough business.
You have a five-sided challenge every day. First, you have the physical space, inventory, staff and steady supplies to manage. Next, you also have to keep moving profits back into your enterprise to maintain profit margins and/or market share. Then, you have to manage your costs so you can have a profit margin of any size. Additionally, you need to allow for tough competition. And, finally, there are the consumer’s preferences…hugely hard to predict.
So, where are they spending?…and they are spending
On a year-over-year basis through October, the report showed these sales results. Car and light truck dealers – up 6.7%. Restaurants and bars – up 5.5%. Furniture – up 5.2%. Building materials – up 4.3%. Department stores – up 0.5%. (No wonder these latter companies had bad numbers.) But wait – there’s more.
Online sales – up 7.1%. This is the number that tells the tale about spending, in my opinion.
The trend
A trend is not a fad. A trend is a long-term move toward – or away from – something. In this case, I believe it’s fairly obvious that the trend that’s developed and will continue to do so in a major way is a switch from investing in department stores and a move toward more online shopping. This is why AMZN hit that new high and partly why Morgan Stanley gave it an $800 price target last week.
I also think that the Wall Streeters have pretty much abandoned the stores. Not in an immediate lack of coverage by analysts or that the stores all close up and blow away right away; more that their whole appeal as a long-term investment is challenged. The sector has generally been in a low to no profit mode since 2011 – not a good trend, to be sure.
My suggestion is that if you own these kinds of shares, as part of your thinking about how to benefit from any year-end tax selling, you may want to consider rolling back or out of your positions and transfer those assets into the leading online shopping companies, or specialty stores with good profit growth, that fit your investment strategy.
Bottom line – remember that Christmas is still coming and people are still going to spend money…on all kinds of things.
Cheers!
Mike
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
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