A Look At Discretionary Spending Through the Earnings Calls

Includes: EL, JWN, SBUX
by: William Trent, CFA

With the consumer high on everyone's mind, I thought it a good time to take a look at some companies exposed to discretionary spending to see what they are saying.

Estee Lauder's (NYSE:EL) three percent growth in North America was in line with the total retail sales growth recently reported. A big question is whether they are in the wrong place at the wrong time.

Although our most rapid growth will come from overseas, we are taking action to improve in the largest individual market, the U.S. However, we expect progress to be slow because of continued softness in department stores. We anticipate that the tough retail climate in department stores will last for at least the first half of your fiscal year. However, we remain committed to the channel. Department stores have unique offerings of designers and brands, and we firmly believe they will remain the cornerstone of U.S. prestige distribution.

That said, we also note that we now generate approximately 34% of our net sales in North American prestige department stores down from 46% five years ago.

(Excerpt from full EL conference call transcript)

Starbucks (NASDAQ:SBUX) grew significantly faster than the average retailer, but not nearly so fast as its investors have come to expect.

Company-operated U.S. retail revenue growth of 19% was driven by the opening of 1,116 new company-operated stores in the last 12 months. During the third quarter specifically, we opened 285 new company-operated locations.

Turning to comparable store sales growth for the U.S. segment, the third quarter saw trends similar to those in the second quarter. The average value per transaction increased 3% while traffic grew less than 1%, resulting in a 4% comparable store sales growth. During the quarter, sales of our core handcrafted espresso-based beverages and premium food offerings were the primary drivers of the growth in same-store sales.

(Excerpt from full SBUX conference call transcript)

The 3% per-transaction growth, again, was just average for US retail. What is still somewhat impressive is growing store traffic at all (even just 1%) while opening new stores at the rate of 3 or 4 per day. Still, they are noticing some shifts in their customer's habits.

It's clear that there is an increased competitive environment. There is an increased pressure on consumers from macroeconomic factors. But in all of those areas, we believe that we have a competitive advantage of being the coffee experts and being able to generate incremental traffic as we go forward, particularly in our core beverages, our core espresso beverages and the things that are uniquely Starbucks.

(Excerpt from full SBUX conference call transcript)

The credit crunch is hitting Nordstrom (NYSE:JWN).

Approximately $14 million of the bad debt reserve is non-comparable due to the previous mentioned accounting treatment for our co-branded Visa receivables that did not occur in the prior year. The remaining $8 million of the incremental provision resulted from growth in both the Visa and proprietary card receivables ahead of plan and from changes to assumed repayment rates versus last year.

These changes stem from observed increases in early stage delinquencies.

(Excerpt from full JWN conference call transcript)

However, the company expects to gain market share.

Our same-store sales expectation is now 5% to 6% for the year, up from 3% to 4% based on our year-to-date performance combined with our plans for the remaining two quarters of the year.

(Excerpt from full JWN conference call transcript)

I think the general consensus is that consumers are feeling some pressure but not enough to really keep them from spending. These conference calls seem to confirm that consensus opinion.