Retail Sales and Retail Earnings
In our note last week, we commented on some dynamics that we saw during the holiday season that made us marginally more cautious on the U.S. consumer:
- Declines in per capita disposable income (Exhibit 1).
- A lower savings rate that implies, to us, that holiday spending was funded out of savings and a situation that is unsustainable, in our view.
- An uptick in consumer revolving credit (credit card) debt outstanding, bucking the overall trend during this recovery. Unless consumers are now more willing to take on leverage than they have been since 2009, we think this too will reverse in the coming months.
We have also conducted an analysis of the impact of the cost of higher heating fuel expenditures (which we will update in short order) as an ongoing headwind for consumers during what is proving to be a grueling winter. Layer on top of that reductions in the SNAP (food stamp) benefits and we have a picture of the consumer under pressure.
This less than rosy picture is revealing itself in retail sales results (Exhibit 2), as sequential declines in January versus December were the order of the day across most channels.
While holiday sales and the weakness in EPS results are yesterday’s news, we do not expect much incrementally positive commentary on January and February when we next hear from a number of retailers and a number of them remain on our least preferred list:
- WMT – company negatively preannounced Q4 already, but we see no reason (aside from some easy Q1 comparisons) to become more constructive on this name given the headwinds we mentioned above, which tend to disproportionately impact lower end consumers.
- TGT – company negatively preannounced holiday sales and is further suffering at the hands of some company specific image issues, but our commentary for WMT applies here as well.
- BBY – the stock is well off its highs and one of the worst performing names in retail YTD. We still think there is sufficient valuation support below $25 share as well as enough company specific levers to pull in 2014 that allow us to be constructive in the medium term.
- WSM – we see some risk to this name, as it has held up reasonably well through the holiday season and subsequent market downdraft. This is a little surprising to us as the Williams-Sonoma brand has had back to back subpar holiday seasons, and we see no reason why this year would be any different.
Bottom line, broadly speaking, we continue to see an unhealthy mismatch between business momentum and valuations across consumer staples and consumer discretionary.