Maybe It Wasn’t Just the Weather?


Earlier in the week, Wal-Mart US President and CEO, Bill Simon, suggested that the U.S. economy had “reached a point where it’s not getting any better but it’s not getting any worse – at least for the middle (class) and down.”

  • He went on to suggest that lower and middle income consumers appear to have made changes to their spending habits that were “not the best thing in the world for a retailer”, referring to a more event-based shopping dynamic.
  • None of this is likely news to investors, but it does set the backdrop nicely for some subsequent data points that may make Simon’s point more forcefully.

The Container Store (TCS) saw its shares tumble after posting its first negative comparable store sales decline (-0.8%) in 15 quarters.

  • Admittedly, TCS has had its issues managing consensus since it has gone public and may be looking to lay blame outside the company;
  • The company decided to evoke images of George Clinton with its description of the consumer as it stated “we’ve come to realize it’s more than just weather and calendar consistent with so many of our fellow retailers we’re experiencing a retail funk”.

Potbelly (PBPB) preannounced lower sales and earnings, suggesting that full-year sales would be flat to down as compared to prior guidance of up LSD.  The company also nearly halved its EPS guidance as well.

  • Again, PBPB has been anything but a high-flier since its IPO, and in a difficult restaurant environment the company appears to be having difficulty resonating with consumers, but the results seem to contribute to a broader theme.

Tractor Supply (TSCO) is another name that has underperformed the S&P by a wide margin in ‘14, and yesterday preannounced Q2 results below consensus expectations ($0.94/$0.95 versus consensus of $1.02).  Full year guidance was moved to the lower end of the existing range, so not a complete disaster.  The company cited weak sales of seasonal products (particularly in the Northeast) as the cause of the earnings shortfall – sort of a weather excuse.

Lumber Liquidators (LL) preannounced a dramatic decline in Q2 comp store sales (-7.1%) after multiple quarters of handily beating consensus.  The company offered a weather-related excuse as well (in part) suggesting that it had experienced out of stocks due to weather issues with its suppliers.  That may be part of the story, but we called out some weakness in housing related home improvement spending and it seems clear that the anticipated rebound in Q2 from Q1 weather-related weakness has not materialized for a number of retailers levered to housing.

Finally, Family Dollar (FDO) reported lower than expected EPS on slightly better than expected comps.  FDO is more of a special situations name at this point, and lackluster results there are certainly not uncommon, but it is part of the consumer mosaic, if you will.

Make no mistake, there are pockets of strength – COST continues to post enviable comparable store sales results driven by continued traffic gains, for example.

We have made clear our concerns about the state of the U.S. consumer and the rate of improvement that we have been seeing.  We continue to see a mismatch between valuations across consumer discretionary (specifically restaurants and retail) and the health of the consumer as reflected in business momentum.

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