After an incredible run in consumer discretionary stocks, buoyed by a US consumer being paid by government to buy buy buy, while increasingly walking away from mortgage debt [Apr 13, 2010: One Out of Ten US US Mortgages is now Delinquent .... Which is Great for Consumer Spending] [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home Owners to be Deadbeats], things might get tougher from here. Amazingly, 5 weeks ago the SPDR S&P Retail ETF (XRT) was not only hitting a yearly high but an ALL TIME high. It continued to rally for about a week after I posted that entry, and since has fallen with the rest of the market - down about 11%.
It shall be interesting to see what the U.S. consumer does from here ... she has pushed her savings rate down to 2.7% (remember she was once at a NEGATIVE savings rate circa 2006 at the height of American consumerism) down from 6%ish during the depths of the Great Recession. [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] She has benefited (and continues to benefit) from the various stimuli mentioned above. Rather than save for a rainy day or retirement she has chosen not to bother (or does not have ability to), after all it take care of itself in the end. [Mar 9, 2010: Nearly Half of Americans Have Less than $10K for Retirement, a Quarter Less than $1K] Then again, savings is not really encouraged in this country anymore, as all public policy favors spenders and debtors. [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors] All the while wage growth in the PRIVATE (not public) sector continues to be under attack. [Apr 30, 2009: First Quarter Labor Costs Rise Least on Record]
But this ponzi can continue for a long time - even as I write this the White House is proposing a new $200B mini stimulus - mostly made up of transfer payments. We now scoff at $200 billion but that was the more than the Bush stimulus of early 2008. It has now become old hat to expect one every 9-12 months. So if this one passes, its essentially another $200B taken from the future, added to the deficit, and handed to the retailers...
- As retailers close the book on a strong first quarter, they're sounding a common refrain: Hope for a steady recovery in consumer spending comes replete with a note of caution. The results so far this year have been encouraging. About two-thirds of U.S. retailers have turned in earnings that topped analysts' expectations, with profits up a healthy 26%, on average, from a year ago, according to Thomson Reuters. (keep in mind the year ago period was the depths of the Great Recession)
- But that doesn't appear to be sustainable. Wall Street analysts estimate the rate of retail profit growth will slow to 17% in the second and third quarters and slip to 11% in the fourth quarter. (year over year comparisons will begin to get much tougher in 2nd half 2010) Several retailers' second-quarter forecasts actually fell short of Wall Street's heightened expectations.
- Among the challenges: tougher year-on-year comparisons. After a financial-sector-fueled meltdown clobbered results in late 2008 and early 2009, retailers adjusted their businesses by aggressively cutting costs and inventories to revert back to a more normal growth rate the rest of 2009. That made this year's comparisons with the year-earlier results tougher, said John Butters, an analyst at Thomson Reuters.
- Other headwinds: unemployment that remains near a record high and the rising costs of key commodities. (please note - I've mentioned the latter point a few times in the past 6 weeks, most notably in the industrial sector i.e. increasing input costs due to steel...but as long as you believe U.S government reporting there is no inflation)
- We are going to be facing inflationary pressures, and I think they are going to get even more significant as we get into 2011, said Jones Apparel Group Inc. Chief Executive Wesley Card on a conference call after the company reported its first-quarter results. Raw-material prices are up [by percentages] in the single to low double digits, whether it's cotton prices or leather prices. Labor costs in China, as the economy has rebounded there, are also moving dramatically up, he added.
- Abercrombie's CEO, Michael Jeffries, last week called the rising price of cotton a serious problem that's intensifying company efforts to cut average unit costs.
- Lowe's and Home Depot say they are feeling the pinch of higher lumber prices, with Lowe's adding that intense competition is keeping it from raising prices to cover those higher costs.
- There also are concerns that retailers' other expenses are rising as they step up incentive compensation, marketing, store remodeling, and the other capital and technology investments needed to stay competitive and to defend market share, analysts said.
- The fragile state of many European economies also is hurting investor sentiment, while declines in the euro and British pound against the dollar may dent those with bigger exposures to that market, analysts said. Phillips-Van Heusen Corp. for instance, has lost 21% of its value since it reached a high on April 25 over concerns that half its Tommy Hilfiger business is vulnerable to conditions in Europe.
- We'll be watchful of what the May numbers look like, said BMO Capital Markets analyst Wayne Hood in an interview. It'll be important for June to show good growth. [The] first quarter sets up for difficult profit comparison.