"In case you haven't seen a sales report these days, February MTD sales are a total disaster," Jerry Murray, Wal- Mart's vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. "The worst start to a month I have seen in my ~7 years with the company." That quote right there is what sent stocks tumbling on Friday before they quickly rebounded in the last half hour of the trading session. Wal-Mart (WMT) fell 2.1 percent to $69.30 at the close in New York for the biggest decline since Dec. 12, 2012. "As with any organization, we often see internal communications that are not entirely accurate, that lack the proper context and represent individual opinions," David Tovar, a Wal-Mart spokesman, said in an interview, adding that the company will report fourth-quarter earnings next Thursday.
When the payroll-tax breaks expired Dec. 31st, Americans began paying 2 percentage points more in Social Security taxes on their first $113,700 in wages. For a person making $40,000 a year, that is about $15 a week. This tax increase is about equal to a year of car insurance for a family making $30,000 or a basket of groceries per month for a family making $50,000 according to analysts and retail executives polled by Wal-Mart.
The question on every investors mind will be, "Is this a Wal-Mart specific situation and how severe is it really"? I think we can safely argue that a slow down in retail spending may be impacting GDP growth in the U.S. currently and we may very well be on the cusp of a more severe slow down in consumer spending as we edge closer to the "spring cleaning" months.
While same store sales having been modestly higher, business leaders aren't carrying the same positive commentary as are being reported in the latest same store sales results from retailers. Take for example Target Corp. (TGT). Target Corp. announced recently that same-store sales for January rose 3.1%. The Minneapolis-based company said net retail sales for the five-week period ending Feb. 2 were $5.97 billion, compared with $4.61 billion a year ago. "Our guests continue to shop with discipline in the face of a slow economic recovery and new pressures, including recent payroll tax increases," said Gregg Steinhafel, CEO of Target Corporation. Let's take into consideration Target's same store sales results from November 2012. Target Corporation reported that its net retail sales for the four weeks ended November 24, 2012 were $6,183 million, a decrease of 0.1 percent from $6,191 million for the four weeks ended November 26, 2011. On this same basis, November comparable-store sales decreased 1.0 percent. Okay, now let's look at December before moving on. Target Corporation reported that its net retail sales for the five weeks ended December 29, 2012 were $10,214 million, an increase of 0.8 percent from $10,138 million for the five weeks ended December 31, 2011. On this same basis, December comparable-store sales were essentially flat. Not for nothing, but I don't like the "growth" in same store sales that I'm seeing out of Target for Q4 2012. Target will report its Q4 2012 earnings on February 27, 2013 and while the company has maintained its original guidance and outlook for the quarter as a whole, one can only suspect that upon its Q4 Earnings release, guidance for FY13 might be less than what analysts are expecting. Just something to consider when evaluating one's holding in TGT.
Target and GRAMMY® Award-winning artist Justin Timberlake are launching a deluxe exclusive edition of the superstars highly anticipated third studio album, The 20/20 Experience. The exclusive album is available now for pre-order but won t be available in stores until March 19. Target has done well to introduce exclusive products in order to drive foot traffic in stores, but to date we haven't seen much impact from these exclusive partnerships. The recent tie-up between Target and Neiman Marcus is just one more example of Target attempting to differentiate itself from the likes of Wal-Mart, but sales of Neiman Marcus goods at Target failed to move the needle. Citibank retail analyst Deborah Weinswig, in a research note titled, "Don't Believe the Hype: Target + Neiman Marcus Holiday Collection Disappoints," took issue with Target for placing the collection in the back of the store. Shelves were full and messy and generating too little visitor traffic, an observation that echoed nationally, she said. A spokesperson for Target said it was unfair to compare the record-setting Missoni sales to the current design collection. It said the Neiman Marcus partnership was conceived as a holiday gift collection designed to last longer, so it was more deeply stocked. I'm going to go on record here as stating that Target's retort to the analyst's commentary was pure "spin" as the retailer deeply discounted its inventory of Neiman Marcus goods shortly after Christmas, by upwards of 70 percent off. Additionally, in Target's third-quarter conference call last month, president, CEO, and Chairman Gregg Steinhafel told analysts it would be "a stretch" to imagine the collection not selling out in a week's time. So between the Target spokesperson and Mr. Steinhafel, the message was a little, how should we say… distorted.
I'm of the opinion that the whole strategy employed by Target with regards to its partnership with Neiman Marcus was poorly orchestrated and offered very little to its faithful Target shopper who were looking for exclusive and limited edition goods at "cheap chic" prices. Joy Wagner of Strother Communications Group and a loyal Target shopper points out the following when analyzing the Target/Neiman Marcus collection from the holiday season: "I examined the collection in person and did not find a "designer-level" of craftsmanship. What I did find were things I did not need or want, and strange juxtapositions like a dog leash from Oscar de la Renta (who typically designs red carpet gowns), a yoga mat from the house of Diane Furstanberg and cookie cutters (?) from Band of Outsiders. Much of the merchandise seemed to personify condescension; cheaply made "designer" items mass produced for people who typically cannot afford designer items. Case in point: I cannot afford any of these rare Judith Leiber creations found on neimanmarcus.com. However, I can obtain one of her mass-produced compact mirrors on sale at Target, if I am hoping to have the same accessory as one out of 10 people. This contradicts the point of high-end fashion. High-end items are coveted because they are hard to obtain; Target + Neiman Marcus Holiday Collection is not."
Target, Wal-Mart and dozens of retailers were scrambling to acquire foot traffic throughout the holiday selling season, but for all of the discounting and advertising, not much came out of it as reported through the retail sales data from the holiday selling season. The following are some bullet points related to reported holiday sales statistics:
- For October 28 through Christmas Eve, retail sales for the holidays rose just 0.7% versus 2011 according to MasterCard SpendingPulse, a measure of credit card usage.
- 2012 looks like the worst holiday-shopping season since 2009, with sales up ~2.8% versus 5.8% jump in 2011 according to Customer Growth Partners which uses mixed sources.
- Online shopping was up, with estimates ranging from 8.4% according to SpendingPulse-- to 16% according to comScore. Note that online adoption has been driving double digit gains for the past decade plus, and 16% was below average.
In January, when all was said and done for holiday sales, the Commerce Department's tally of December retail sales showed a meager 0.5 percent rise from the previous month, driven primarily by auto purchases. However, excluding motor vehicles, sales dropped by 0.2 percent month over month. Several categories showed alarming weakness. Sales at electronics and appliance stores plunged 3.9 percent, while general merchandisers fell by 0.8 percent in December. Even online retailers saw sales decline by 0.4 percent in December. On a brighter note, clothing stores saw a 0.7 percent increase in sales, while building retailers edged higher by 1.6 percent.
Retail sales in the month of January fared even worse as the increase in taxes appeared to take effect. Retail sales rose a scant 0.1% last month following a 0.5% gain in December, the Commerce Department said on February 14, 2013. Sales rose a somewhat faster 0.2% excluding the large auto sector. "Normally people reduce their savings when their tax rates go up," said Steve Rick, senior economist at Credit Union National Association in Wisconsin. Rick added, "It looks like consumers did drop their spending a bit. It may be signs of stress on lower and middle-income people. They don't have much savings to begin with."
The picture is pretty clear, retail sales are beginning to show signs of weakening. Consumer spending accounts for as much as 70% of the U.S. economy and sales at retailers represent about one-third of that consumption. So retail sales is a good proxy for how fast the economy is growing, though economists look at longer-term trends because the monthly data is volatile and subject to sharp revisions.
So what's next for the retailers? Well, we will certainly find out next week when the retailers begin reporting Q4 2012 earnings and giving FY13 guidance. If we add up the some of the parts which we already have in hand, a weaker than anticipated holiday sales season, a less than spectacular January Retail Sales report, curtailed discretionary income due to a higher tax rate, higher prices at the gas pump (already at $4.00 a gallon in some regions of the U.S.) and a looming sequestration beginning in March 2013, again, the picture becomes clearer.
Of course we can't forget about the jobs outlook in 2013. We have created an abundance of jobs over the last few years, but I'm sorry to be the one to put the jobs picture into to focus for many who don't fully recognize the quality and quantity of those very jobs being created. The fact is that if we take into account immigration, population increase and graduation rates in the U.S. over the last 12 months, we are very clearly at a net loss when it comes to employment in the United States.
Sure it's nice to see month after month of 100,000+ jobs being created, but when juxtaposed with roughly 2,500,000 graduating students and immigrant individuals in the United States every quarter, something is being missed in the data. The number of immigrants and students graduating from college are on the rise in the United States despite what popular media proliferates as evidenced by more recent studies. Although the United States no longer leads the world in educational attainment, record numbers of young Americans are completing high school, going to college and finishing college, according to a Pew Research Center analysis of newly available census data.
About 1.5 million, or 53.6%, of bachelor's degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years. In 2000, the share was at a low of 41%, before the dot-com bust erased job gains for college graduates in the telecommunications and IT fields. Out of the 1.5 million who languished in the job market, about half were underemployed, an increase from the previous year. Broken down by occupation, young college graduates were heavily represented in jobs that require a high school diploma or less. If you wonder why that bright young man was handing you your cup of coffee at Starbucks or bagging your groceries at Publix the other day, they simply can t find a job fitting the skills set they acquired through their respective four year collegiate degree.
Come Tuesday, we shall certainly see what the market has in store for investors, but my guess is on red, although I hope I'm wrong.