Consumers Becoming Thriftier When It Comes to Retail

Key Points:

• Consumers are spending, but they are looking for bargains
• Cheaper gasoline prices are helping to boost store traffic at BJ's Wholesale Club (BJ)
• Plunging trade-in values for SUVs are making it more difficult for consumers to afford new cars

Lackluster Retail Sales

Yesterday, the Department of Commerce said retail sales rose just 0.1%. Had stimulus checks not been distributed, there would have been a large decline instead.

Auto sales skidded 3.6% and furniture sales fell 1.4%. Electronics, building materials and restaurants also saw lower sales.

All other retail categories showed improvement, however. Not surprisingly, gas stations showed the biggest increase with a 4.6% rise in sales. Unfortunately, higher crude prices are not allowing the gains to translate into profits for the gas stations or the refiners that supply them.

Consumers Actively Seeking Discounts

Though the numbers show that consumers are continuing to spend, other data suggests Americans are being more selective about where they shop. This shift has benefited discount retailers, such as Family Dollar Stores (FDO).

Last week, FDO claimed that same-store stores sales surged 8% in June, well above its internal forecasts. CEO Howard Levine observed that the strength was broad-based and included improvement in both apparel and seasonal items.

FDO guided for fiscal-fourth quarter profits of 30 cents to 35 cents per share, when it reported fiscal-third quarter profits at the start of July. The guidance led all of the covering brokerage analysts to raise their quarterly forecasts by 3 cents to 32 cents per share.

Notably, the consensus earnings estimate for fiscal 2009 was revised higher as well. The average forecast now stands at $1.65, 7 cents higher than the consensus estimate of a month ago.

It's not just FDO that is doing well in the current environment. BJ's Wholesale Club and The TJX Companies (TJX) also reported a significant increase in June same-store sales.

Gas Prices Attracting Consumers

BJS enjoyed an 8.3% increase, excluding gasoline. Store traffic rose 6% and the size of the average transaction was approximately 2% higher. These metrics show that not only were more people coming to the store, but that they were spending more once they walked in the door.

It is worth noting that the impact of gasoline sales extends beyond just the numbers. Wholesale clubs typically are one of the cheapest places to fill up. Therefore, the store traffic numbers are likely receiving a boost from shoppers who are walking in simply because they drove over for the gas. Nonetheless, the increase in transaction size suggests that consumers are shopping when the price is right.

About one-fourth of the covering brokerage analysts have raised their 2008 profit projections on BJS. The revisions have pushed the consensus earnings estimate 2 cents higher to $2.14 per share.

Discounts Are Helping Too

TJX realized a 5% jump in same-store sales last month. CEO Carol Meyrowitz credited summer weather for helping demand, though if it was just the weather other retailers would have thrived as well. In other words, TJX's lower prices were probably the primary driver behind the better sales.

Meyrowitz believes the positive momentum for her company will continue throughout this month and raised her second-quarter profit guidance to between 44 cents and 45 cents per share. Subsequent revisions by many of the covering brokerage analysts caused the consensus estimate to reach 45 cents, up 4 cents from a week ago.

The average forecast for the full-year was also revised higher. The 2008 consensus earnings estimate of $2.24 is 2 cents higher than the average projection of a week ago.

FDO is a Zacks #1 Rank ("strong buy") stock. BJS and TJX are Zacks #2 Rank ("buy") stocks. All three are classified in Retail-Discount Variety. This group contains four other Zacks #2 Rank stocks: including Big Lots (BIG), Dollar Tree (DLTR), Freds (FRED) and Wal-Mart (WMT).

SUVs Sitting On Dealer Lots

Last month's 3.6% skid in auto sales reflected several factors. The sluggish economy has made consumers thriftier, which means lower demand for new cars. Tightened credit standards and falling home equity means financing a car purchase is more difficult for some buyers. Then, there is the cost of gas, which makes lower-priced, more fuel efficient vehicles attractive to a broader audience.

Demand for SUVs has plunged and that has caused reverberations for auto dealers. SUVs carry higher margins and therefore create more profits for dealers on a per vehicle basis. Slackened demand means lower profit.

The drop in demand has also caused SUV prices to plunge. Thomas J. Folliard, CEO of CarMax (KMX) observed on his company's fiscal first-quarter conference call that "the rapid depreciation across this large product segment has been unlike anything I've seen in my career".

Falling prices for SUVs not only hurt car dealer margins, but they also directly impact sales. Many consumers faced with lower trade-in values and a slack economy have difficulties coming up with the additional cash required to buy a new car. In such instances, they are either forced to scale back their purchase plans or continue to drive their current vehicles.

Given these factors, it is not surprising to see brokerage analysts cutting full-year profit projections on multiple companies within Retail/Wholesale Auto/Truck. This group contains three Zacks #5 Rank ("strong sell") stocks - Asbury Automotive Group (ABG), Group 1 Auto (GPI) and Sonic Automotive (SAH) - and four Zacks #4 Rank ("sell") stocks - KMX, Autonation (AN), Penske Auto Group (PAG) and Rush Enterprises (RUSHA).