The Worsening Retail Climate

This week’s big retail sector news is the poor showing by virtually every major retailer during the month of January, with virtually ever retailer reporting a YoY sales decline. However in many instances the retailers reporting nominal sales increases actually had inflation adjusted sales declines, especially within the fuel, grocery and healthcare segments. Retail Metrics reported that its comparable sales index rose just 0.2% in January, and the UBS-International Council of Shopping Centers figure of 0.5% was the worse in nearly four decades.

From the AP via Yahoo News:

The UBS-International Council of Shopping Centers preliminary sales tally of 43 retailers rose 0.5 percent in January, well below the original 1.5 percent forecast. The results followed an anemic 0.7 pace in December and were below last year's same-store sales average gain of 2.1 percent. Michael P. Niemira, chief economist, said January's performance was the weakest ever, according to records that go back to 1970. It is based on same-store sales, or sales at stores open at least a year.

Wal-Mart (WMT) reported a 0.5% increase in same store sales, which after an adjustment for fuel, healthcare and grocery inflation is undoubtedly a negative number. In their news release Wal-Mart noted: “customers appear to be holding gift cards longer and "using them more often for food and consumables rather than discretionary purchases."” The hopes of Wal-Mart (and other retailers) for January sales fueled by massive gift card redemptions have been dashed by consumers using them as veritable savings accounts, to fund rainy expenditures on food and other necessities.

Wal-Mart’s results were probably helped by consumers who typically shopped at Target (TGT) or competing grocery chains going down market. The fact that this influx of new customers wasn’t enough to generate a significant YoY sales gain for Wal-Mart, indicates the typical customer shopping at their stores is either financially strapped or simply being cautious. The real answer is probably a combination of both.

Target reported a 1.1 decline in same story sales in January; analysts were expecting a decline of 0.6%. Target’s sales decline is probably the result of losing customers to Wal-Mart, in addition to its core customers being forced to spend less. In the current consumer spending environment Target is caught in the middle and may suffer more than Costco (COST) or Wal-Mart.

Costco reported a 7% gain in same store sales, 3% ex-fuel sales. Their international division benefited from the weak dollar and turned in a YoY increase of 9%. Costco enjoys a rather affluent consumer base and was able to beat its sales target of 6.6% via having fewer customers that needed to reel in their spending, as well as having other customers that shifted more of their spending to Costco. As the retailer with arguably the most wide ranging and diverse product line in the business, Costco is uniquely positioned to attract more of its existing customer’s discretionary income away from their competitors.

Luxury retailers turned in mixed results with Nordstrom (JWN) reported a 6.6% same store decline, Saks (SKS) reporting an increase of 4.1% and Neiman Marcus’ sales up 3.3%. My explanation for the performance of the luxury retailer segment is the presence of something I call the “Luxe retail poseur factor”, quite simply it’s the degree to which a luxury retailer’s numbers are inflated by middle class consumers using debt to “spend-up” the income ladder. It’s much easier to find a Nordstrom in an average income community than a Neimans or Saks, as the latter two retailers are typically concentrated in the wealthy areas of major cities. This could be the reason that Nordstrom sales have declined more than Saks or Neiman Marcus, they simply have more “Poseur” shopping in their stores.

At the end of the day January’s numbers are part of a trend of declining consumer spending that goes back at least five months. Despite being reported as “positive” the retail sales numbers for September, October and November, were all negative after you adjusted for inflation, especially within the energy, grocery and healthcare segments. December’s numbers weren’t any better as few retailers reported YoY sales increases for the holiday shopping season.

Perhaps the most telling statistic is that revolving consumer debt rose by 8.8% in the 3^rd quarter and 9.3% in the 4^th in spite of the weak retail numbers, which suggests that people are using credit cards to fund household expenses instead of discretionary spending.

The economic stimulus package is unlikely to alter the downward trend in consumer spending anytime soon, as the checks aren’t scheduled to be issued until after tax season by which time we could already be in a recession. Furthermore there is no guarantee that people will use the money to fund discretionary spending, the money may all go towards debt, savings, groceries and other necessities.

Despite the gloom around consumer spending and its recessionary implications this trend could turn into a positive, provided revolving debt balances slow down their advance and begin to decrease. If revolving debt balances begin to decline coupled with a continued slowdown in consumer spending, the result will be households with lower debt loads, higher savings and stronger finances. Wal-Mart, Target and Costco may earn less money, but we’ll still wind up with a stronger economy over the long run.

People need to ask themselves what’s more important: financially stable households or the retail sector meeting their revenue targets at the expense of the nation’s long-term economic stability?

For those interested in doing more reading on the subject:

• The WSJ provides an excellent sortable table of sales results for selected retailers here; their primary coverage is available here.
• The Financial Times’ coverage can be read here.
• Associated Press coverage (Via Yahoo) is available here.

Sources:

The Associated Press (via Yahoo News) “Stores Had Disappointing January Sales” – Anne D’Innocenzio, February 7, 2008.

The Financial Times: “Post-holiday sales disappoint US retailers” – Jonathan Birchall, February 7, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article.

Comments

[gemmanager:]

Fast forward to July 2008 SKS stock is worth less than half it's 52 week highs. I live right down the street from South Coast Plaza a world class destination mall and the numbers are dismal. This area of Orange County was ground zero of the sub prime debacle. The fake riche' shoppers are gone their losing their houses. Luxury is keeping your job and having money to fill your tank to get to work. California is undergoing a big shake up across all sectors. I'm laughing at all the high paid politically correct upper management now. I'm sure corporate earnings and store numbers suck and their worried about how much longer they'll occupy their cushy offices (Barbie collections and all) before the transfer. Thank god I went back to the small business model I thrive in and the numbers prove it. Talent is never recognized through the layers of political fluff and ass kissing.

2008 Jul 08 06:30 PM