For the second consecutive month, retail sales in the United States fell by 0.2%, slightly less than the consensus prediction for a 0.3% decline in the month of May. Excluding automotive expenditures, May retail sales fell by 0.4% compared to April. However, when compared to May 2011, all retail sales grew by 5.3%--and by 4.3% when excluding automotive sales. Undoubtedly we'd like to see that figure growing every month; however, we think it's important to focus on the bigger picture. Investors should focus on year-over-year numbers, not sequential numbers.
In this light, year-to-date retail sales are actually up 7% when compared to the first five months of 2011 (6.6% ex-auto's), but that number has been largely ignored. We think the significant year-over-year acceleration is more telling than a 2-month sequential decline. Furniture sales are up 9.4% year-to-date and building materials, supplies, and gardening material sales are up 11.1%, which we think suggests resilience in the housing market and in household formation. Building materials did fall sequentially (-1.7%), but that could be a reflection of warm weather pushing forward sales to previous months. This sector was still up 5.3% when compared to May of 2011. The only real weakness in housing-related businesses was in appliance and electronics sales, which are up only 0.5% year-to-date (though they grew 0.8% sequentially). However, this could be attributed to weaker pricing and powerful effects of Amazon (AMZN) cannibalizing electronics sales from Best Buy (BBY), hhgregg (HHG) and even Walmart (WMT).
In addition to strong sales year-to-date, the Producer Price Index declined as a result lower commodity costs and energy costs. We feel that lower input costs will be a positive for manufacturers that may be squeezed by a still fragile economy. This could provide unexpected upside to corporate profits and lead to even higher retail sales if consumers receive lower prices.
Though some like to downplay the role of automotive (i.e. "ex-auto's), we think the May Retail Sales survey supports on bullish outlook on the automotive industry. In 2008, when the financial and automotive industries were in turmoil, a 2003 study from the Center for Automotive Research cited that 1 in 10 jobs depend on the domestic auto industry. Whether or not that's accurate, we think the automotive sector has an enormous impact on the US economy. May automotive sales (parts/dealers) were up 0.8% sequentially, 10% versus May 2011, and are up 8.7% year-to-date. This bodes well for everyone from the dealers like Penske (PAG) and Lithia Motors (LAD), to our favorite automaker Ford (F), as well as GM (GM), Toyota (TM), and Volkswagen (VLKAY). We think the automotive refresh cycle is still in its early innings, and that robust auto sales could mitigate soft spots elsewhere in the broader economy.
Again, in spite of recent negative data in the employment market, we think the domestic economy is stronger than some pundits may lead investors to believe. A decline in energy prices will help consumer discretionary spending, and we think there are plenty of strong companies selling at discounts to their respective fair values to choose from. Namely, we think some of the holdings in our Best Ideas Newsletter, including Apple (AAPL), Visa (V), EDAC Technologies (EDAC) and Buffalo Wild Wings (BWLD) are less dependent on Europe and are likely to hold up well in any US economic environment.
Additional disclosure: Some of the firms mentioned above may be included in our Best Ideas Newsletter.