By Kevin Grewal, Editorial Director at www.SmartStops.net
With various signs that a global economic recovery is up and running, consumer spending is the one thing that could put the brakes on this trend.
Most recently, economies in Japan, Germany and France were able to expand due to a rebound in global manufacturing. Additionally, GDP numbers were better than expected in the United States and exports increased by 1.9% in June. These are all great indicators that the health of the overall global economy is improving, however, in the U.S., it is the consumer that will fuel a sustained economic recovery, and data suggests that consumers are still wary.
Most large U.S. retailers are openly stating that consumers are just outright reluctant to spend. Discount retailer, Target (NYSE:TGT), who is up 75% from a March close of $25.37 to close at $44.32 on Tuesday, recently reported a decline in sales of 6.2% from the prior year. Things are even worse in the luxury retail sector, where Saks Inc. (NYSE:SKS), reported a decline in same-store sales of 15.5% over the past quarter, despite witnessing gains of 269% from a March low of $1.55 to close at $5.72 on Tuesday.
It appears that the average consumer is still putting tight grip on his wallet and is penny pinching as a result of high unemployment rates, stagnant wages and tight lending. Tight credit has had a significant impact on retail sales as Target states that one-third of its overall sales come from credit card transactions and believes that tightening credit standards may have contributed to as much as half of one percentage point to its same-store revenue declines.
This trend of penny-pinching is not only affecting revenues, but has forced many retailers to trim inventories which will prevent them from offering massive markdowns and eventually bolster profits. In fact, Neiman Marcus recently stated that they cut purchases by nearly 25%. This strategy of leaner inventories and fewer choices could potentially back-fire if customers are disappointed with a lack of choices or are unable to find discounted merchandise.
Although the vast majority of retailers seem to be hurting in the revenue department, those that are providing bare essentials at highly discounted prices seem to be doing okay. Recently, TJX Companies (NYSE:TJX), which operates the highly discounted retail chains TJ Maxx and Marshalls, reported an increase of sales of 4% and was up 77% from its January low of $19.42 to close at $34.33 on Tuesday.
Consumer spending is so vital to the American economy because it constitutes nearly 70% of the nation’s GDP. Although most economists believe that modest economic growth will be seen in the second half of the year, the consumer could potentially be the counterweight of an economic recovery and an increase in consumer spending will be absolutely necessary to sustain growth.
From an investor’s perspective, one must keep in mind that investing in these mentioned equities comes with risks and to help minimize these risks implementing an exit strategy is of importance. According to the latest data from www.SmartStops.net, an uptrend in these equities could be in trouble at the following price levels: TGT at $41.79 ; SKS at $5.00; TJX at $33.11.