On January 15, 2013, the Census Bureau released its report on December advance retail sales. The report showed an sales increase of 0.5% from November versus expectations of a 0.2% increase. The report also showed growth of 4.7% from the previous December.
Although investors were generally pleased with the report, a look inside the numbers reveals a continued decline in retail spending. You may wonder how this can be true given the headline growth numbers in the report. But as the report explains, the retail sales estimates from month to month are adjusted for seasonal variations and holidays. In other words, the Census Bureau adjusts the numbers in an effort to provide meaningful comparisons between various time periods.
Of course, these adjustments make a lot of sense when comparing two consecutive months. But the value diminishes (almost entirely in my view) for year-over-year comparisons. In this case, the use of unadulterated data provides more meaningful and reliable information. First, the data is not subject to any errors in the assumptions associated with seasonal adjustments. In addition, the raw data aligns with the year/year comparisons that corporations use to forecast and report their revenues. While many companies are creative in reporting income on a Non-GAAP basis, they are not yet adjusting revenues and earnings based on the type of "seasonal variations" identified by Census Bureau (at least not to my knowledge).
December Retail Sales Growth Was the Lowest In Three Years
The retail sales report states that the year/year growth in December was 4.7%. As explained above, however, this number is based on seasonally-adjusted data. The unadjusted data reveals that December sales only increased by 2.45% over the previous year. This represents the lowest monthly growth rate since January 2010.
The chart below shows the year over year retail growth rates by month for the past three years. The blue data series shows total retail sales and the red data series excludes auto sales.
After a strong start in the first quarter of 2012, retail sales trended down the rest of the year. In the second half, growth rates for several months dropped to the 2%-3% range. We may start to see the effect of these declines in corporate earnings for Q4.
Auto Sales Strong, But Parts Suppliers Weak
The December retail report shows that automobile sales continued to be strong. After many months of growth in the 8%-10% range, growth in December held steady at 5%. It appears that the strength in new car sales over the past couple years has started to take its toll on suppliers of automotive parts and accessories. As illustrated in the chart below, there is a significant downward trend established for that sector. This could impact companies like AutoZone (AZO) and O'Reilly Automotive (ORLY).
Weakness for Building Material and Garden Suppliers
In the first quarter of 2012, business for home improvement retailers was booming. A chart of the year/year growth in this category shows growth at nearly 15% during that period. That pushed up the price of companies like Home Depot (HD) and Lowe's (LOW) over the past year. Indeed, noticing the spike in the growth rate early last year would have generated big profits in those names. With these stocks at the highs, things have changed. Growth turned negative in December, and it will likely stay that way due to difficult comparisons as we move into the first quarter of 2013. Now may be a good time to book gains in those holdings.
Clothing Sales Also Weak in December
Another category that showed a change in trend was clothing sales. After a good November, the sales in December were only 2.45% above the previous year. There are many different companies in this space that will be hurt if the downward trend continues. Keep in mind that many of these companies have already reported holiday sales. So this news is already priced in. To play continued weakness in this sector, ETFs such as XRT, PMR, and RTH may be the best option.
Disclosure: I am short HD.