Seeking Alpha
Long/short equity, special situations, growth at reasonable price, deep value
Profile| Send Message|
( followers)  

On a day offering the first real test for stocks since the latest Federal Reserve quantitative easing program, with five economic reports on the slate, Retail Sales led the opposition. You would think that retail sales growth of 0.9% on the month -- a Street beating figure (consensus at +0.8%) -- would be good news. However, as always, I'm here to put the report under the microscope and show you why it is not.

While sales beat Wall Street in the headline, our survey of the report shows that is misleading. The first important point to make is that Retail Sales for the month before (July) were revised lower, to +0.6%, from +0.8% when reported initially. The effect of lowering your basis for comparison is to raise the percentage gain for the current period if the result comes close to being in line. Thus, unlike the percentage change superiority over the economists' consensus, you bet your bottom dollar that the absolute forecast figure for the consensus is closer to the absolute real result for August.

The second point I want to make is that this data does not adjust for price changes, and so is influenced by price changes, including in volatile food and energy. Thus, when we take out the sales of autos and gasoline, we find that those sterilized retail sales only increased by 0.1% against the revised higher July gain of 0.9%. Wall Street is not stupid, and so incorporated the monthly increase in gasoline prices to find an adjusted expectation for a 0.4% gain here (versus its +0.8% forecast for overall retail sales). Obviously, the ex-gas and auto forecast was still too high, and so the result is a disappointment on all counts.

Looking within this data, we see the catalyst is not autos. Ex-auto sales still increased 0.8% in August, off the unadjusted prior increase of 0.8% in July. So, you can contain your concern for Ford (NYSE:F) and General Motors (NYSE:GM) that might have been tied to this report. Those two stocks were up sharply Friday, probably because of market focus on this line detail. Both Ford and GM had been trading down on global concerns before the latest central bank actions and the gains reported today. Thus, the stocks look to have real support moving forward.

Gasoline station sales gained sharply on the higher price of gas in August. Those sales rose 5.5% against July, driving the top line of companies like The Pantry (NASDAQ:PTRY), but also, of course, Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). Gasoline prices are projected to continue higher, thanks to rising oil prices on nascent geopolitical "fires" and on refining capacity constraints. Thus, these stocks also continue to find support, in my view.

Retail trade sales, which is what most people think of when they hear about this report, increased by 0.9% in August, against the 0.7% gain in July. However, we'll need to once again focus on the specific types of sellers to really glean any important information about the stocks you may own. General Merchandise Store sales declined by 0.3% in August, after a 0.1% increase in July. While this category would include Wal-Mart (NYSE:WMT), it also includes non-discount department stores like Sears (NASDAQ:SHLD), Macy's (NYSE:M) and J.C. Penney (NYSE:JCP). Department store sales, when broken out, rose 0.1% in August, against their 0.8% gain in July. I think that what this data is telling us is that the pie is shrinking, and so there will be winners and losers when retailers next report earnings. Thinking about that, the discounters and online options continue to take dollars away from their other brick and mortar competitors.

Ahead of the new Apple (NASDAQ:AAPL) iPhone release, the sales of Electronics and Appliance Stores like Best Buy (NYSE:BBY) fell by 1.4% in August, versus their 1.0% gain in July. Obviously, things will change as we incorporate the new iPhone into forward sales. As a result, and given the importance of electronics to American consumers, these shares should receive support on weakness.

Supporting the case for homebuilders and renovators, the sales of Building Material and Garden Equipment Supplies Dealers like Home Depot (NYSE:HD) increased by a solid 1.0% in August, following the 1.2% gain made in July. Construction data continues to show multi-family project growth and public sector homebuilder market share gain. The beaten down sector thus continues to grow as the rest of the economy is coming under pressure.

Food and beverage sellers, including grocery stores, saw sales unchanged in August. Without incorporating any change in food prices in the month, this could be due to consumers choosing to eat out less at casual dining establishments like those provided by Brinker International (NYSE:EAT) and Darden (NYSE:DRI) restaurants. Cheaper options like McDonald's (NYSE:MCD) should then find trade-down traffic, but international companies like MCD are finding issue in their European and Chinese markets of late. With regard to grocery, Wal-Mart is gaining share from traditional markets like those provided by Supervalu (NYSE:SVU) and Kroger (NYSE:KR). So, Wal-Mart still looks like a winner, at least on the operating lines. However, I recently questioned its valuation in another post.

Clothing and accessories stores like Abercrombie & Fitch (NYSE:ANF) and The Gap (NYSE:GPS) may not have gotten a good enough lift from back-to-school shopping, given the segment's sales declined 0.1% against July. Of course, this is also going to be a fashion and smaller pie story, with some stores gaining as others lose customers. Industry analysts will have a better bead on fashion trends than I do.

Non-store retailers, including some of America's favorite destinations like eBay (NASDAQ:EBAY) and Amazon.com (NASDAQ:AMZN) saw no change in August sales, against a 1.9% increase in July. We might pin the July gain to the record high temperatures across the U.S. this summer, which may have kept consumers in their air conditioned homes, perhaps still shopping away on their laptops instead of at the malls and other retail stores. August is a holiday period, but no change is unexpected here, given the heat and the back-to-school driver. Perhaps consumers don't have time to wait for shipping, or aren't home to receive packages, during the vacation period ahead of the start of school. We'll have to wait on corporate earnings reports and September's sales data to know for sure.

All in all, August looks like a disappointment for retail sales in my estimation, save perhaps the auto industry and gasoline providers, and also the construction materials peddlers. It is likely the higher price of gasoline that hurt the rest of the sector. As it looks like gasoline prices are only going to ebb higher from here. Given geopolitical fires and capacity constraints, not much should change for the better. The consumer mood is deteriorating on a once again, apparently weakening the domestic economy. In conclusion, this report supports my case for the spread of recession to our shores not too long from now.

Source: August Retail Sales Disappoint