How Did Major Retailers Do in August?

Here is a quick rundown of the performance of various leading retailers during the month of August:

Clothing retailers - Aeropostale (ARO) (13%) and Buckle (BKE) (22.4%) reported solid numbers, while Abercrombie (ANF) (-11%), Hot Topic (HOTT) (-2.7%), Limited Brands (LTD) (-7%) all showed declines. In general all clothing retailers showed YoY declines, making the performance of Aeropostale and Buckle even more exceptional.

Department stores did poorly all around: with J.C. Penney (JCP) (-4.9%), Kohl's (KSS)  (-5.8%), Dillard's (DDS) (-7%), all showing declines.

Discounters fared okay with Wal-Mart (WMT) showing a 3% YoY increase in sales and Family Dollar (FDO) showing an increase of 3.6%; however Wal-Mart's heavy bias towards grocery sales and pharmacy products suggests that its sales numbers were helped by inflationary pressures.

Target (TGT) reported a YoY sales decline of -2.1%. I suspect that its recent poor results are a function of Target positioning itself as a trendy retailer as opposed to a low price leader, coupled with its product offerings, which lean towards home furnishings, fashion, and other discretionary items. This puts them in the unfortunate position of not being the retailer you look to for cheap groceries or household necessities, in addition to being a retailer many consumers are cutting back their spending on.

Still, the fact that Target has higher income customers than Wal-Mart or Family Dollar should position them for a solid recovery over the medium to long-term.  And let's not forget that the "retail slumming" effect means that the latter two retailers currently have customers that are shopping there out of need and not out of choice. It stands to reason that some of the company's new customers are going to return to the places they used to shop once things recover.

Warehouse Stores also showed positive results with B.J.'s (BJ) and Costco (COST) reporting increases of 7.7% and 6% respectively; however the companies' sales (like Wal-Mart’s) were undoubtedly helped by grocery inflation. The performance of the warehouse stores lends credence to the theory of consumers cutting back on discretionary items, and hunting for bargains on household necessities, groceries, etc.

Luxury Retailers weren't able to escape the effects of the economic downturn, with Neiman Marcus (NMG), Nordstrom (JWN) and Saks (SKS) reporting declines of -0.5%, -7.9% and -5.9%. I suspect (as I did before) that the declines at the luxury retailers are more due to the loss of the companies' "poseur" or "faux housing wealth effect" customers, than it is an indication of people in the top 5-10% truly cutting back on their spending. Once the poseur shakeout is complete, I think sales at the luxury retailers will stabilize.

When you look at the big picture, you see only two retailers who can truly celebrate right now are Aeropostale and Buckle.  The rest of the group is either suffering declines or having positive results that are being muted by inflationary pressures, thereby goosing their revenue numbers.

While a lot of economists, analysts, et al, will point towards specific numbers for gas prices, a housing recovery, etc, etc, as being key to a consumer spending recovery, I think it will be more a function of sentiment and financial health. Consumer sentiment is weak because of all the financial pressures consumers have been dealing with, things that have been building up for years in the form of debt loads, energy prices, healthcare prices, etc. The events of the last 18 months weren't so much a singular shock that brought things down, as they were the straw that broke the camel's back.

In fact, you could argue that easy credit (credit cards, HELOCs, mortgages, etc), merely delayed the onset of the current consumer woes, and by all rights, consumer spending should've been slowing down for several years running.

The weakening state of household balance sheets is the key driver behind the consumer spending slowdown; and a true recovery isn't possible until the economy recovers and consumers (on aggregate) are able to pay down debt, get their costs under control and improve their overall financial health. While improvements in various economic indicators will help things, the average person tends to base their view of the economy, their finances, etc, on how they're able to make ends meet, not on a specific price for gas, unemployment rates, etc.

$3.00 gas and a stable housing market isn't going to make someone who is struggling with their mortgage, maxed out credit cards, health insurance, grocery inflation, etc, feel especially confident about their finances and as if they can return to their old spending habits.

The final thing to consider is that the consumer spending levels of old were heavily driven by excessive use of credit, and many consumers are likely to "wise-up" and not spend above their means like they used to. This is not to say that all consumers will turn into debt hawks and cheap skates, just that it's very likely that the go-forward retail spending picture won't resemble the old one in terms of credit usage and overall magnitude (i.e. consumer spending will recover but not necessarily to the degree and in the fashion that many expect).

Comments

[basehitz:]

Your work is instructive. Several articles about collective debt level have me very concerned:

1) From Seeking Alpha
The Great Consumer Crash of 2009
by: James Quinn posted on: August 14, 2008

2) From Dr. Marc Faber Market Comment: October 9, 2005
gloomboomdoom.com
(Note here that the ONLY time in history when our debt level even approached today is just before the Great Depression. Not a prediction, just an editorial note. But today our debt level is worse. )

3) from Barrons Feb 11, 2008
"This Credit Crisis Has a Long Way to Run"
Interview with Jeremy Grantham, Chief Investment Strategist, GMO
Barron’s By SANDRA WARD

The above is a lot of data to take in. The picture, due to grossly excessive credit expansion, is bleak.

I disagree with your suggestion that consumers will wise up. Some will for sure. But most won't until they are forced. And they will be due to credit restrictions now becoming much tougher. The banks will cut them off.

2008 Sep 07 10:24 AM

[nickdutson:]

<p>This year will be remembered as a wipeout for the lion’s share of the equity market. Those individual shares slated to finish the year in positive territory are few, and those that thrived are even scarcer.</p>
<p> But one that did was <strong>Family Dollar Stores</strong> Inc., which heads into the last trading session of 2008 as the best performer among the Standard &amp; Poor’s 500-stock index, with a year-to-date gain of nearly 30%.</p>
<p>In a year of struggles for the American consumer, for business spending, technology, and international growth, that FDO is the winner in the S&amp;P 500 may not be surprising. The company operates more than 6,000 retail discount stores in 44 different states, specializing in consumer staples, including food and cleaning products, although it does sell economically sensitive items. RealtyNet Advisors, Inc offers Family Dollar properties for sale as <strong>Tenant In Common Replacement Properties</strong&... </p>
<p>“They do sell some apparel items and some consumer items but they’ve been tilting their strategy toward food, which we like,” says Patrick Dunkerly, lead portfolio manager of the UMB Scout Mid-Cap Fund, which owns the stock. “Part of our thesis on Family Dollar was that the lower gas prices should help them.” </p>
<p>With consumer confidence tumbling to an all-time low in December, it’s clear that Americans remain stressed about their outlook for the future, so the easing of gasoline prices would be more likely to fuel purchases of staples. As people try to save money, Family Dollar becomes a more attractive shopping option, and Wedbush Morgan analysts say the company has responded, improving “the assortment and quality of merchandise categories and store appearance in order to attract low to middle-income consumers struggling with their budgets.” </p>
<p>However, analysts are beginning to believe the stock may be hitting a ceiling, for now. Buckingham Research analysts note that investors may be reluctant to buy shares with the forward price-to-earnings ratio sitting near 15 “when earnings are expected to decline for two years in a row.” Still, the company and its rival, Wal-Mart Stores, are among the few that have continued to post year-over-year increases in same-store sales growth. Wal-Mart shares are also up on the year, having gained more than 15%. </p>
<p>“It’ a little bit late to get really excited about it,” says Mr. Dunkerly, who has been reducing the firm’s position in the stock. “Overall, it’s a fine company, but I think the push-back from the Street is that it’s not that cheap anymore.” Do your homework like RealtyNet Advisors did, and invest in a company that will not just survive but grow through these hard economic times.<br />
</p>

Jan 06 03:54 PM