Retail Sales: It's Hard to Find Much Good In the May Report

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Includes: HD, LOW, XRT
by: Zacks Investment Research

By Dirk van Dijk

Retail Sales in May were far below expectations, coming in with a decline of 1.2% on the month when the consensus of economists was looking for an increase of 0.2%. If auto sales are stripped out, the numbers were still disappointing, with a 1.1% decline when a 0.1% increase was expected.

If there is a silver lining in this report it is that both the headline number, and the ex-autos number, for April were revised upwards from an increase of 0.4% to 0.6%. That is a very thin silver lining. Relative to a year ago -- against a very easy comparison -- total sales were up 6.9%, while sales excluding automobiles were 6.1% higher than a year ago. On both counts that is a significant slow down from the year-over-year rates in April, when total sales were up 9.0% and up 7.8% excluding autos.

The 1.7% decline in sales for auto and parts dealers was a big surprise since it does not seem to match up well with the new auto sales numbers that the car companies released last week for May. The category includes not just auto dealers, such as CarMax (NYSE:KMX), but also the parts stores like AutoZone (NYSE:AZO). Year-over-year, though, sales in the category are up a very healthy 11.2%, although that is a big decline from the 15.2% year-over-year increase in April.

Which Areas Suffered Most?

The area that suffered the most in May was the Building Materials stores like Home Depot (NYSE:HD), where sales plunged 9.3% on the month and are up just 3.1% year over year. That was a big reversal from April, when the hardware stores were the strongest category, with an 8.4% rise, that brought the year-over-year sakes growth to 13.9%.

The reason is most likely a surge of activity in April as people tried to spruce up their houses for sale ahead of the expiration of the home buyer tax credit. When the tax credit expired on April 30, sales fell off a cliff. If the two months are averaged together, the decline works out to 0.85 per month, which is probably a better way of looking at the group.

Lower gas prices in May pressured sales at gas stations, which suffered a 3.3% decline on the month, more than erasing a 0.5% increase in April. However, on a year-over-year basis, oil prices and hence gasoline prices are still well above year ago levels. Lots of the increases, though, were last spring and early summer, which means that the year-over-year comparisons will get tougher for gas stations (but easier for drivers). Gas station sales were up 20.2% year over year in May, down from a 30.6% year over year gain in April.

Gas stations sales are generally much more affected by the price of gasoline than they are by changes in the volume of gasoline sold. The number of 44 oz soft drinks and hot dogs off the rollers sold does not change all that much from month to month, and would certainly not explain a 3.3% decline. Thus, in general, this is one area where it is good to see negative numbers.

The graph below (from CalculatedRiskblog.com/) shows total retail sales, and retail sales excluding gas station sales, over time. Notice how much faster the total fell than the "sales ex-gas stations" line during the meltdown as oil prices plunged. The rebound has been faster, but sales excluding gas stations are much closer to their pre-recession peaks than are total sales.

While the numbers are seasonally adjusted, they are not adjusted for price changes, so one has to factor in inflation over time, but that is not a big issue right now as inflation is not currently a major problem (nor is it likely to be one in the short to intermediate term).

Two Brighter Spots

Two of the brighter spots for retail sales in May were furniture and electronics/appliance Stores. Both rebounded from weak April results.

Furniture store sales were up by 1.0% on the month and up 5.3% year over year. In April they were down 2.0% on the month and up just 3.1% year over year. Electronics/appliance store sales increased 0.6% on the month, reversing a 0.6% decline in April. They were up 5.0% year over year in May versus a year over year increase of 3.1% in April.

The rebound might be the flip-side of what we saw in the building supply numbers. After people buy a new (for them) house, they tend to fill it with new furniture and perhaps new appliances. Thus, the April spike in home sales led to a rise in sales at these stores in May. If this is the case, the effect will probably last a few more months (until the backlog of closings from the tax-induced spike in sales has moved through the python), but then there could well be a bit of a hangover.

Overall this was a very disappointing report, and one that indicates that the economy had the wind knocked out of its sails in May. This is a very important indicator of overall consumption, which makes up 71% of GDP. If consumption is falling, it is hard to see very robust growth in GDP in the second quarter. This is only one month’s data, so it is a bit early to call it a trend, but it is hard to find much good to say about these numbers. (Click to enlarge)