As Consumer Confidence Tanks, Who Loses in Retail?
(Stocks in this article: NYSE: SKS, NYSE: JWN, NYSE: TIF, NYSE: COH, NYSE: WMT, NYSE: TGT, NYSE: NDN, NYSE: FDO, Nasdaq: DLTR, NYSE: M)
Last week's reporting of the RBC Cash Index showed improved consumer confidence, but recent readings from the Conference Board and University of Michigan portend trouble for retailers. We wondered which players could be most impacted by decreased consumer spending.
As consumer confidence seems to be falling off a cliff just before the critical holiday shopping season, we are taking this opportunity to measure which retailers could be impacted most in the months ahead. Friday morning, the RBC Cash Index indicated improvement in October, as the confidence measure improved to 80.6, from September’s 71.1. The result was no doubt driven by the market enthusing Fed rate cut last month. However, we expect the drivers of longer-term confidence are not yet supportive. In the week before last week, the Conference Board posted its September Consumer Confidence Index at 99.8, down from August’s measure of 105. The metric also came in short of Bloomberg’s consensus of economists, who anticipated a reading of 104.
Finding a trend in the Conference Board’s Consumer Sentiment Index has not been quite as easy as the search within the University of Michigan’s record. A quick study of the recent history of the Michigan Sentiment reading shows a clear trend downward as the year progressed, with a bump up in July as it became clear that second quarter GDP growth would be relatively strong. Since July, however, it’s become increasingly evident that future economic growth could soften.
Month --------- Conference Board -------- U. of Michigan Sentiment
September ----------- 99.8 ------------------ 83.4
August --------------- 105 -------------------- 83.4
July ------------------ 112.6 ------------------ 90.4
June ----------------- 103.9 ------------------ 85.3
May ------------------ 108 -------------------- 85.3
April ----------------- 104 -------------------- 87.1
March --------------- 107.2 ------------------ 88.4
February ------------ 112.5 ------------------ 88.4
January ------------- 110.3 ------------------ 91.3
Weighing on consumers’ minds, and pocket books, are relatively expensive energy and gasoline prices, rising food and dining expenditures, adjusting higher mortgage payments and a loss of home equity value, which is often referred to as the wealth effect. The perception of having value in one’s home lends to consumers’ mental well-being and propensity to spend. Thus, many experts believe, as do we, this reverse of the wealth effect should provide yet another limiting factor to consumer spending. In any event, the many pressures noted above are quite a lot to swallow, and with the consumer carrying the heavy load within the American economy, recession seems a strong possibility.
This past Tuesday’s Weekly Same-Store Sales Report from the International Council of Shopping Centers – UBS, did not offer any better news than recent consumer sentiment figures, excluding RBC. The ICSC-UBS report showed no change in spending compared to the week just prior. When compared to the year ago week, same-store sales rose 2.1%. That kind of growth seems okay, except for the fact that sales trends had been running much hotter last year and even earlier this year.
So, now that we have established our view that consumer spending should soften further, and retailers could face tough times, let’s examine which players might be impacted most. Since poor people are squeezed easiest, high-end retailers like Saks (NYSE: SKS), Nordstrom (NYSE: JWN) and Tiffany & Co. (NYSE: TIF), and producers (with stores) of high-end offerings like Coach (NYSE: COH), should be able to avoid significant impact.
However, on the low-end, at the discount chains, we have already seen warnings of bad times to come. Wal-Mart (NYSE: WMT) warned in August that the second half of the year would likely make for tough going, and reduced its earnings guidance. Then a couple weeks ago, Target (NYSE: TGT) chimed in, lowering its same-store sales growth projection for September to a range of 1.5-2.5%, from its previous forecast for 4-6% growth.
Even the “dollar store” concepts, like 99 Cents Only (NYSE: NDN), Family Dollar (NYSE: FDO) and Dollar Tree (Nasdaq: DLTR) may be hit as overall spending declines. We know what you’re thinking… If people cannot shop at Macy’s (NYSE: M), maybe they’ll head over to Family Dollar. However, we expect they will also shop less, and as general spending decreases, this could expose a saturated retail environment. In such an environment, your favorite Greek expects industry consolidation will occur, which could in turn impact commercial construction. We expect the retail industry to soon join the ranks of work force reducers. You see, when times get tough, first you fire folks, and then you close stores.
Now, the Labor Department data released this morning does not indicate a shedding of labor weight among retailers as yet, but with the holiday shopping season just around the corner, that would not make sense now in our view. We are approaching the time of year when seasonal hiring occurs, and so we would simply expect less of that now.
Company ------ Ticker ----- 90-Day Ch. EPS Est.--- Ttm P/E ---- PEG 5 Yr. Gr.
Wal-Mart ----- NYSE: WMT ------ (7.4%) ------------ 15.3X ------- 1.2
Target --------- NYSE: TGT -------- (3.0%) ------------ 19.7 -------- 1.3
Family Dollar- NYSE: FDO ------ No Change -------- 17.3 -------- 1.4
Dollar Tree --- Nasdaq: DLTR -- No Change -------- 20.8 -------- 1.5
Tiffany -------- NYSE: TIF ------- +13.6% ------------- 30.4 -------- 2.5
Nordstrom --- NYSE: JWN ------ +1.6% -------------- 18.5 -------- 1.6
We studied the 90-day changes of current quarter EPS estimates, since we find analysts are typically late in making longer-term adjustments as times and operating environments change. We found the higher end names in Tiffany and Nordstrom actually showed increases in quarterly estimates, while big discounters Wal-Mart and Target showed decreases. Among the deep discount “dollar concept” names, the results were mixed. It seems clear our theory should hold true, and lower end retailers end up feeling the greatest impact of a burdened consumer.
Interestingly, valuations coincided with the studied firms’ outlooks, so that the companies with upward EPS adjustments are trading at a premium on a P/E-to-growth basis. We justify this by pointing out the need of institutional portfolio managers to put capital to work in the sector, while maintaining diversification of their portfolio and participation in a sector their benchmarks are sensitive to. Delta moves stocks, or in English, change and also rate of change play a role in the movement of stock prices. If you are a portfolio manager now, you are likely avoiding investing in a deteriorating operating model. So, while valuations are richer among the high end players, we would only expect capital support to maintain that or enrich the high-end stocks more. As a side note, we add that niche specialty retailers, in the right niche mind you, could also attract capital. One of our upcoming articles will bring one such idea into focus.
If you would like to advertise in the space below our articles, we are now offering tailored plans, including assistance in ad design. Contact us at WallStreetGreek@gmail.com to find out more. (disclosure)
Last week's reporting of the RBC Cash Index showed improved consumer confidence, but recent readings from the Conference Board and University of Michigan portend trouble for retailers. We wondered which players could be most impacted by decreased consumer spending.
As consumer confidence seems to be falling off a cliff just before the critical holiday shopping season, we are taking this opportunity to measure which retailers could be impacted most in the months ahead. Friday morning, the RBC Cash Index indicated improvement in October, as the confidence measure improved to 80.6, from September’s 71.1. The result was no doubt driven by the market enthusing Fed rate cut last month. However, we expect the drivers of longer-term confidence are not yet supportive. In the week before last week, the Conference Board posted its September Consumer Confidence Index at 99.8, down from August’s measure of 105. The metric also came in short of Bloomberg’s consensus of economists, who anticipated a reading of 104.
Finding a trend in the Conference Board’s Consumer Sentiment Index has not been quite as easy as the search within the University of Michigan’s record. A quick study of the recent history of the Michigan Sentiment reading shows a clear trend downward as the year progressed, with a bump up in July as it became clear that second quarter GDP growth would be relatively strong. Since July, however, it’s become increasingly evident that future economic growth could soften.
Month --------- Conference Board -------- U. of Michigan Sentiment
September ----------- 99.8 ------------------ 83.4
August --------------- 105 -------------------- 83.4
July ------------------ 112.6 ------------------ 90.4
June ----------------- 103.9 ------------------ 85.3
May ------------------ 108 -------------------- 85.3
April ----------------- 104 -------------------- 87.1
March --------------- 107.2 ------------------ 88.4
February ------------ 112.5 ------------------ 88.4
January ------------- 110.3 ------------------ 91.3
Weighing on consumers’ minds, and pocket books, are relatively expensive energy and gasoline prices, rising food and dining expenditures, adjusting higher mortgage payments and a loss of home equity value, which is often referred to as the wealth effect. The perception of having value in one’s home lends to consumers’ mental well-being and propensity to spend. Thus, many experts believe, as do we, this reverse of the wealth effect should provide yet another limiting factor to consumer spending. In any event, the many pressures noted above are quite a lot to swallow, and with the consumer carrying the heavy load within the American economy, recession seems a strong possibility.
This past Tuesday’s Weekly Same-Store Sales Report from the International Council of Shopping Centers – UBS, did not offer any better news than recent consumer sentiment figures, excluding RBC. The ICSC-UBS report showed no change in spending compared to the week just prior. When compared to the year ago week, same-store sales rose 2.1%. That kind of growth seems okay, except for the fact that sales trends had been running much hotter last year and even earlier this year.
So, now that we have established our view that consumer spending should soften further, and retailers could face tough times, let’s examine which players might be impacted most. Since poor people are squeezed easiest, high-end retailers like Saks (NYSE: SKS), Nordstrom (NYSE: JWN) and Tiffany & Co. (NYSE: TIF), and producers (with stores) of high-end offerings like Coach (NYSE: COH), should be able to avoid significant impact.
However, on the low-end, at the discount chains, we have already seen warnings of bad times to come. Wal-Mart (NYSE: WMT) warned in August that the second half of the year would likely make for tough going, and reduced its earnings guidance. Then a couple weeks ago, Target (NYSE: TGT) chimed in, lowering its same-store sales growth projection for September to a range of 1.5-2.5%, from its previous forecast for 4-6% growth.
Even the “dollar store” concepts, like 99 Cents Only (NYSE: NDN), Family Dollar (NYSE: FDO) and Dollar Tree (Nasdaq: DLTR) may be hit as overall spending declines. We know what you’re thinking… If people cannot shop at Macy’s (NYSE: M), maybe they’ll head over to Family Dollar. However, we expect they will also shop less, and as general spending decreases, this could expose a saturated retail environment. In such an environment, your favorite Greek expects industry consolidation will occur, which could in turn impact commercial construction. We expect the retail industry to soon join the ranks of work force reducers. You see, when times get tough, first you fire folks, and then you close stores.
Now, the Labor Department data released this morning does not indicate a shedding of labor weight among retailers as yet, but with the holiday shopping season just around the corner, that would not make sense now in our view. We are approaching the time of year when seasonal hiring occurs, and so we would simply expect less of that now.
Company ------ Ticker ----- 90-Day Ch. EPS Est.--- Ttm P/E ---- PEG 5 Yr. Gr.
Wal-Mart ----- NYSE: WMT ------ (7.4%) ------------ 15.3X ------- 1.2
Target --------- NYSE: TGT -------- (3.0%) ------------ 19.7 -------- 1.3
Family Dollar- NYSE: FDO ------ No Change -------- 17.3 -------- 1.4
Dollar Tree --- Nasdaq: DLTR -- No Change -------- 20.8 -------- 1.5
Tiffany -------- NYSE: TIF ------- +13.6% ------------- 30.4 -------- 2.5
Nordstrom --- NYSE: JWN ------ +1.6% -------------- 18.5 -------- 1.6
We studied the 90-day changes of current quarter EPS estimates, since we find analysts are typically late in making longer-term adjustments as times and operating environments change. We found the higher end names in Tiffany and Nordstrom actually showed increases in quarterly estimates, while big discounters Wal-Mart and Target showed decreases. Among the deep discount “dollar concept” names, the results were mixed. It seems clear our theory should hold true, and lower end retailers end up feeling the greatest impact of a burdened consumer.
Interestingly, valuations coincided with the studied firms’ outlooks, so that the companies with upward EPS adjustments are trading at a premium on a P/E-to-growth basis. We justify this by pointing out the need of institutional portfolio managers to put capital to work in the sector, while maintaining diversification of their portfolio and participation in a sector their benchmarks are sensitive to. Delta moves stocks, or in English, change and also rate of change play a role in the movement of stock prices. If you are a portfolio manager now, you are likely avoiding investing in a deteriorating operating model. So, while valuations are richer among the high end players, we would only expect capital support to maintain that or enrich the high-end stocks more. As a side note, we add that niche specialty retailers, in the right niche mind you, could also attract capital. One of our upcoming articles will bring one such idea into focus.
If you would like to advertise in the space below our articles, we are now offering tailored plans, including assistance in ad design. Contact us at WallStreetGreek@gmail.com to find out more. (disclosure)
posted by The Greek | 9:04 AM
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