Retailers Leading the Way? Not Really.

For months now, investors have been looking to the retail sector for insights on the US economy. After all, 70% of US GDP comes from consumer spending. So the retail sector is often thought of as a bellwether for the US economy as a whole.

Things aren’t looking good, though retailers have been doing their best to mask this.

Take the April same-store sales numbers, for instance. That month, same-store sales declined for most major retailers. However, instead of admitting that things were slowing down, they blamed an early Easter and rainy weather for their poor results.

Not much of a cover-up.

First of all, retailers knew that Easter came early this year. It was already factored into their forecasts— forecasts that they subsequently missed.

As for the weather excuse, it’s pure nonsense. Yes, I suppose if there were a typhoon people would shop less. But even a second-grader knows it rains in the spring. How come retail executives and Wall Street types can’t discount this fact into their forecasts?

These excuses look even more absurd when you take in some of the more glaring items in April’s results. Most notably:

• A record 80% of retailers missed estimates.
• The UBS-International Council of Shopping Centers’ sales tally posted a decline of 2.3%, the biggest drop since the index started tracking data.
• Wal-Mart (WMT) posted its biggest monthly decline in 28 years.

Thus far, the Goldilocks crowd has managed to overlook these items. They believe that the US consumer is going strong thanks to Bush’s $600 rebate checks.

At first glance, May’s same-store sales results seem to support this view. Except for one small problem— these results don’t distinguish food and energy sales from clothing and other discretionary items.

With gas at $4 and food prices expected to rise 5% this year— the largest increase since 1990— I’m willing to wager that most of the retail growth is coming from these segments, not merchandise.

Greg Weldon, of Weldon Financial, agrees with me. According to Greg’s analysis, 77% of the increase in retail sales for the first three months of 2008 came from food and gas. Greg states that if you remove these two sectors, retail sales actually fell 2% in 1Q08.

Most major retailers are doing everything they can to keep this fact from seeing the light of day. Consider the May sales numbers for Wal-Mart, Costco (COST), and BJ’s Wholesale Club (BJ).

Last week, Wal-Mart and Costco reported May same-store sales growth of 3.9% and 7%, respectively. Seeing this, the Goldilocks crowd rejoiced, claiming that growth of this caliber negates the view that we're in a recession.

Then BJ’s crashed the party.

BJ’s Wholesale Club actually broke its sales figures down by sector. Total same-store sales growth was a fantastic 13%. By segment, gasoline sales jumped 6% while food sales jumped 11%. Merchandise was flat.

I guarantee you that most of the sales growth coming from Wal-Mart and Costco is the result of high food and energy prices. And this illusion is the only thing keeping consumer discretionary stocks from collapsing. Should Wal-Mart or Costco come clean that merchandise has fallen off a cliff… the clothing retailers and other sellers of discretionary items would really plunge.

Simply put, the US consumer has shifted from buying things he doesn't need and can't afford to buying things he DOES need and can BARELY afford. By the time investors figure this out, the whole retail sector will be hitting record lows

And while the Federal Reserve may do everything it can to postpone financials' collapse, it's not going to bail out Nordstrom (JWN)  or the Gap (GPS). I think clothing retail in particular is ripe for short-selling.

Comments

[pochovilla:]

You would never be heard on Kudlow. Too much noise before you could complete your thought. Besides, now I assume you don't believe in the "tooth fairy" or the "sunshine theory", on Wall St etc. Too bad that Alice fell into the rabbit hole. Everything is ok if she took the right pill.

2008 Jun 13 01:54 PM

[Jake2:]

Viva Villa!

2008 Jun 13 01:58 PM

[Jake2:]

PS: "I don't have to show you no stinking badge!"

2008 Jun 13 01:59 PM

[billddrummer:]

A great analysis!

I've long maintained that since COST and WMT sell food and gasoline, those sectors will prop up comp sales even if merchandise sales slow. You've proved the point brilliantly.

2008 Jun 13 02:13 PM

[MFoxBCguy:]

Great article. I agree with shorting GAP, but high-end retailers like Saks and Nordstroms cater to the "new banks"- rich people. Watch as the institutions put more emphasis on wealth management and trim their investment banking arms. The rich stay rich.

2008 Jun 13 03:52 PM

[dingojoe:]

I believe your thesis is correct, but the math is off somehow. A 6% increase in gas sales plus an 11% increase in food sales and flat merchandise sales can't add up to a 13% increase in SSS.

Actually, gasoline sales must have jumped by way more than 6%. The gasoline sales accounted for almost half of the stores sales increase. While BJs doesn't provide the info, gasoline sales had to have been up 25-30% or more in dollars.

2008 Jun 13 03:53 PM

[secmaven:]

Since Costco gas and Walmart gas are 20 cents a gallon less than the street prices due to the membership subsidy Costco and Walmart gas volumes are up and going higher. Meanwhile imported merchandise prices are up and going higher while unit volume is dropping. This country is in a retail recession guys whether the talking heads on WS and the govt want to admit it or not.

2008 Jun 14 12:14 PM

[adan:]

excellant article, thanks!

what's ironic is -

when food and gas prices finally come down, and the stock market is celebrating, reported retail sales will finally crash

and at that point, as you suggest, the fed, who's busy saving the biggest banks, will be unable/unwilling to save the retail sector

but isn't that part of why they've been preparing the banks survival?

maybe we should be doing the same: dump our bad assets, get rid of our debt, and shore up our balance sheets

now if we could just get some health coverage with that :-)

2008 Jun 14 06:51 PM

[Common Sens...:]

This writing is DEAD ON!!! I work for one of the above mentioned retailers. I look at these category sales on a daily, weekly and monthly basis. Hardlines category sales are WAY down! There has been an obvious shift of dollars to the necessities. Good analysis.

2008 Jun 14 11:06 PM