Consumers are Reigning Spending In

From the WSJ:

As the U.S. economy entered into crisis mode in September, so did the retail sector, ramping up discounts and special offers to entice reluctant shoppers.

But the retailers who reported September sales results Wednesday -- with the exception of Wal-Mart Stores Inc. and other discounters -- are indicating the promotions hardly helped. Many retailers reported worse-than-expected declines, with some -- such as Target Corp. and J.C. Penney Co. --- issuing downbeat estimates for the quarter.

.....

For the most part, the discount sector has been the only one to perform well amid recent economic troubles. Shoppers increasingly have been turning to warehouse and big-box discounters as they try to get the most for their money. Most other sectors have been suffering as shoppers continue to pull back on discretionary items, despite retailers' efforts to lure the bargain-hungry shoppers with greater discounts.

A rise in discount sales at the expense of all other stores is a bad development. It's worse when you consider that 70% of US growth comes from consumer spending.

Consider the following charts.



The simple line chart tells us that real retail sales (inflation-adjusted) have been stalling for some time).



The year over year percentage change shows that retail sales have been dropping hard for some time.



Personal consumption expenditures -- which also include durable goods -- shows the same decline.

The bottom line is the consumer is definitely pulling in his spending.

Retail Sales Surprise on the Upside

From the WSJ:

Shoppers spending their government rebate checks helped push May retail sales higher, giving companies such as Wal-Mart Stores Inc. a bigger-than-expected lift.

The majority of the growth came at discounters, such as Wal-Mart, Costco Wholesale Corp. and BJ's Wholesale Club Inc. Most department stores' sales declined, and sales at clothing chains fell short of forecasts.

IBD added the following:

Cash-strapped consumers flocked to value-oriented retailers known for low prices on necessities like food, but they scrimped on buys at stores that sell nonessentials like clothes.

.....

Department stores and women's apparel chains continued to struggle. Cooler weather hurt sales of summer goods, said Perkins. But consumers just were not in a mood to buy nonessentials.

"We had these ongoing macro drags like $4 gas, rising food prices and a soft job market, which are very much cutting into discretionary spending," he added.

Same-store sales fell 6.5% at specialty apparel stores and 3.5% at department stores, said Michael Niemira, chief economist at the International Council of Shopping Centers.

.....

But overall, the consumer remains very frugal, Niemira said.

Frugality has led consumers to trade down. Middle- to upper-income households, who typically shop at Target (WMT) and elsewhere, are looking more at Wal-Mart, dollar stores and food discounters, says Frank Badillo, senior economist at TNS Retail Forward.

Here is a graph from IBD that shows how various stores did:



While we're talking about retail, let's look at the retail holders ETF to see how retain is doing overall in the market.



Retail -- like most areas of the market -- dropped after the initial shocks from the credit crisis hit the markets in the late summer of 2007. The index crossed below the 200 day SMA at the end of the summer in 2007 and continued to move lower until mid-March of 2008. Looking at the chart there is a double bottom that formed with the first bottom in January and the second in mid-March. Prices have rallied along with the market since the mid-March rally started.



On the 3-month chart, notice the following:

-- Prices are above the 200 day SMA

-- Prices are above all the SMAs

-- Prices are technically in a bullish alignment, with the shorter SMAs above the longer SMAs. But....

-- The 10 and 20 SMAs have been heading lower since the end of April.

-- However, yesterday we saw a big volume move.

Retail Sales Disappoint

From the AP:

The nation's retailers reported the weakest March sales in 13 years on Thursday as consumers -- fretting about mounting economic problems and enduring a frigid Easter -- limited their shopping to food and other essentials.

With prices at the pump rising and worries about jobs increasing, shoppers bought basics at discounters and wholesale clubs and snubbed mall-based chains' clothing, jewelry and furniture. The earliest Easter in 95 years also hurt sales; shoppers weren't in the mood to buy spring clothing in cold weather.

Wal-Mart Stores Inc. and Costco Wholesale Corp. were among the best performers. Wal-Mart raised its earnings outlook, noting that better inventory control helped to limit markdowns on merchandise.

But March proved to be another weak month for many others, including J.C. Penney Co., Gap Inc., and Limited Brands Inc. All of them reported sharp drops in sales.

"Discounters are going to continue to do well in this economy," said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. "Anything that is discretionary is going to continue to be under pressure."

Here's a link to a sortable chart from the WSJ.

The bottom line is weakening job growth



Rising unemployment (although still at low levels)



Declining disposable income



Leads to lower confidence



And sentiment



Which lowers sales.

Let's take a look at the retail sector chart across a set of time frames



On the five year chart, notice the following:

This is a daily increment chart. Notice how prices are moving around the 200 day SMA. While there is a slight upward slope to the line, this is not the strongest slope we've ever seen. It's as much trading range as it is a rally.



Starting in July of last year, notice the chart starts to move lower in a big way. The chart is making lower lows and lower highs. Also note prices are about 10.6% below the 200 day SMA, indicating we're in a bear market area.



On the three month SMA chart, notice the following:

-- Remember that prices are below the 200 day SMA

-- The shorter SMAs are all moving lower

-- The 10 is below the 50 and the 20 is about to cross below the 50

-- Prices are below all the SMAs

Short version: this chart says sell me.

Retail Sales Up. .3%

From the Census Bureau:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $382.9 billion, an increase of 0.3 percent (±0.5%)* from the previous month and 3.9 percent (±0.7%) above January 2007. Total sales for the November 2007 through January 2008 period were up 4.4 percent (±0.3%) from the same period a year ago. The November to December 2007 percent change was unrevised from -0.4 percent (±0.4%)*.

Retail trade sales were up 0.4 percent (±0.7%)* from December 2007 and were 3.8 percent (±0.8%) above last year. Gasoline station sales were up 23.0 percent (±2.8%) from January 2007 and sales of nonstore retailers were up 10.6 percent (±2.0%) from last year.

The problem occurs in the details.

So what increased?

Food and Beverage Stores: +.6%
Grocery Stores: +.3%
Health and Personal Care Stores, +.8%
Gas Stations: +2%
Clothing: +1.4%
Autos: +.6%

What does this tell us?

1.) Necessities are increasing.
2.) How much of the food and gas station increase is the result on food a gas inflation?
3.) I have no idea why autos increased. It's especially odd considering:

Economists were surprised by the gain. Car companies reported earlier this month that sales fell to just a 15.3-million annual rate.

What decreased?

Furnitures/home furnishings: -.5%
Sporting Good Stores/Hobby: -1.3%
Building Materials/Gardens: -1.7%
Electronics/Appliance: -1%

Housing still stinks. No duh.
Leisure activity and electronic gizmos. Non-necessities (that's a word now).

The point is the food and gas inflation are behind at least some of the increases. Also, consider this:

However, excluding autos and gas, sales were flat in the month. Read government report.

So, two areas are responsible for those increases. But of those two areas --

1.) Auto sales increased despite auto companies reporting falling sales, and

2.) Gas sales -- while are subject to some pretty serious inflationary pressures -- are responsible for a large part of the gains.

Color me unimpressed.

What Inflation? and What Recovery?

The following charts are from This Week in Petroleum.

Gas Prices









Note the price difference between last year's and this year's prices.

Gas: 78.7 cents
Diesel: 84.5 cents
Heating Oil: 89.3 cents
Propane: 55.8 cents.

These aren't small increases. Not only are there strong fundamental reasons for the weak retail sales figures from the holidays there are also strong headwinds against the consumer going forward.

Yesterday, I looked at oil's charts. Right now, it's consolidating between roughly $88 and $100/bbl. While the long term chart shows a possible double top formation, oil hasn't dropped below key support levels despite increasing evidence of a US slowdown. These prices could be key to the speed with which the economy recovers.

More on Holiday Sales

From the NY Times:

By early December, the traditional start of the holiday buying rush, Coach, Target and Starbucks — arguably the reigning trendsetters among American retailers — warned that the number of consumers walking into their stores had begun to dip, or was likely to, as consumers restrained their spending.

Coach cautioned that the 20 percent growth rate for handbags over the last several years would most likely fall to 10 percent for the final months of this year — nothing to be ashamed of, but a significant setback. And Target, which is used to monthly sales increases of 4 percent or more for its stores, said results for December could fall 1 percent, a rarity for the chain.

A final sales tally from the season will not be available from most chains until next week. But an early projection from MasterCard Advisors, a unit of the credit card company, found that overall spending from Nov. 23 to Dec. 24, when adjusted for inflation, was essentially unchanged over last year, a weak performance.

From IBD:

A last-minute shopping frenzy probably wasn't enough to meet modest holiday sales forecasts, according to the latest retail estimates and discount giant Target. (TGT)

Same-store sales rose 2.8% in the week ended Dec. 22, the biggest weekly gain in two years, according to the International Council of Shopping Centers. But that didn't make up for poor showings in the weeks leading up to Christmas.

"Given the slow performance at the beginning of the month, it appears that the industry is on track for a sales gain that is slightly under our original expectation," ICSC Chief Economist Michael Niemira said in a statement.

As a result, retailers are offering "desperation discounts""

Dillard's Inc., Macy's Inc. and Home Depot Inc. slashed prices the day after Christmas as U.S. retailers attempted to avoid the worst holiday-shopping season since 2002.

Spending surges after the Thanksgiving holiday and last weekend weren't enough to boost holiday buying as consumers facing $3-a-gallon gasoline and declining home values limited gift purchases. The International Council of Shopping Centers lowered its November and December sales forecast yesterday.

``People should expect dramatic discounts, and in some cases, desperation discounts,'' Burt Flickinger, managing director at Strategic Resource Group, said yesterday in an interview on Bloomberg Radio.

Saks Inc. held a one-day, 70 percent-off sale yesterday on designer clothes. Dillard's is selling women's cashmere sweaters for 40 percent off. Polo Ralph Lauren Corp. was selling handbags at almost a 60 percent discount.

Bottom line -- things aren't looking that good for retailers right now.

So -- How Was the Shopping Season?

Not that hot.

From the WSJ:

Spurred by heavy discounting, U.S. shoppers spent furiously in the days just before Christmas. But holiday retail sales appeared to still fall short of industry expectations, setting the stage for bigger markdowns in the increasingly important post-Christmas period.

The 11th-hour rush helped strengthen a weak holiday season. From the day after Thanksgiving to midnight Monday, total retail sales, excluding automobiles, rose 3.6% over the previous year, according to MasterCard SpendingPulse, a unit of MasterCard Advisors. But factoring out spending on gasoline -- which soared thanks to a 27% average price increase since this time last year -- retail sales increased a lackluster 2.4%. Industry forecasts had predicted gains of 3.5% to as high as 4.5

"The surge at the beginning of the season and the surge at the end of the season definitely resulted in the modest growth that we saw," Michael McNamara, vice president of research and analysis for MasterCard Advisors, said in an interview yesterday. "If we didn't have those surges, it would have been a negative story."

From Bloomberg:

Last-minute purchases during the pre-Christmas weekend failed to salvage what may be the slowest holiday spending season in five years.

MasterCard Inc.'s consulting unit said yesterday that sales from Nov. 23 to Dec. 24 gained 3.6 percent. Spending in the week through Dec. 22 dropped 2.2 percent, the fourth week of declines, even after sales increased almost 20 percent over the weekend, Chicago-based ShopperTrak RCT Corp. said earlier this week.

Target Corp., the second-biggest U.S. discounter, said Dec. 24 that sales at stores open more than a year may decline in December after customer visits slowed in the weeks after Thanksgiving. Sales in November and December this year may rise 4 percent, the slowest growth since 2002, according to the National Retail Federation.

The late buying surge over the weekend is ``not going to overcome the negative forecasts,'' Frederick Crawford, managing director at Southfield, Michigan-based AlixPartners LLP, said in a Bloomberg Television interview. ``It's going to be a good start, a very weak midsection, and a strong finish. But those two barbells at the end are not going to be able to overcome these last three weeks, which have been very weak.''

It looks like sales increased, but not by as much as people wanted. In addition, there are serious questions about the impact of all the discounting on retailers bottom lines. While we'll have to wait until the next earnings season to find out, I don't think it's going to be good news.

But Will It Be a Good Christmas for Retailers?

From the WSJ:

Some big stores, among them Macy's Inc. and Sears Holdings Corp.'s Kmart, stayed open around the clock to accommodate shoppers. And mega markdowns enticed many customers. Among them was Andy Gress, a teacher from Knoxville, Iowa, who braved a coming snowstorm to prowl the Jordan Creek Town Center west of Des Moines on Saturday. Having done much of his shopping weeks ago, he was back looking for stocking stuffers.

Merchants throughout the Iowa mall were advertising substantial discounts: "Everything 50% off," the sign in the New York & Co. window said. Across the hall, rival apparel retailer C.J. Banks, part of Christopher & Banks Corp., promised "Save up to 70% off."

"Sales were coming at the expense of profit margins," said A.T. Kearney's Mr. Mityas, referring to the spate of heavy promotions that characterized much of this holiday's marketing.

At some point, cost-cutting eats into profits in a big way. I don't know if we are at that point with these numbers, but I think it's very possible we're going to see some nasty earnings surprises from some retailers in the Spring.

Retailers Having a Tough Holiday Season

From the Street.com

This past weekend brought a big surge of traffic, but not enough to make up for the lack of sales throughout the holiday season, industry observers say. As a result, retailers will have to cut their prices deeper -- driving down profit margins -- and keep their doors open longer to gain some ground in the home stretch.

.....

Britt Beemer, chairman of America's Research Group, expects holiday sales to increase only 1.8% this year, his lowest forecast in over 10 years.

Even with deeper discounts this week, Beemer is skeptical that retailers can make up for the traffic they lost all season.

.....

Although Black Friday, or the day after Thanksgiving, generated a 4.8% increase in traffic, industry watchers say things have tapered off considerably since. The first two weeks of December saw a lull, and only now are the crowds starting to come back.

.....

And the peak of the season is still to come. This Saturday is expected to be the busiest shopping day of the year for retailers, eclipsing Black Friday.

Chen expects those retailers who have been promoting all along will continue promoting, including in the women's apparel sector, which saw soft sales even before the holiday season began.

.....

Even online sales seem to be losing some traction. According to research firm, comScore, online retail spending has grown more than $22 billion between Nov. 1 and Dec. 14, which marks an 18% climb. While that still represents a record level, it is less than the 26% increase during the same period last year.

.....

"The current economic realities appear to be having a negative impact on the growth in consumer spending," said comScore Chairman Gian Fulgoni in a statement. "From the subprime housing meltdown to a decline in home values to higher gas prices and an uncertain stock market, many consumers across all income segments are either feeling the pinch this holiday season or are lacking the confidence to spend at the rate they had in the past."

Remember that big discounts = lower profit margins.

I should also make the following cautionary remarks.

1.) Americans love to shop and will do anything to continue shopping. That means that while there is still time before Christmas it's possible consumers could pick-up the pace.

2.) I would extend the "Christmas shopping season" to sometime in January because of gift cards and the heavy, post-Christmas promotions we have seen of the last 5+ years. It's standard to see all sorts of new year's bargains.

3.) All that being said, there are plenty of reasons for consumers to pull in their spending wings right now. The housing market is a mess, the economy has plenty of bumps in it, energy and food prices are high (and food prices are probably increasing) and in general people are very concerned about their economic environment. This is not a situation that encourages free-spending ways.

Is is a long-term chart of retail sales from econoday.



Although there was a decline in the year-over-year number from January 2006 to mid-2007, the number has been increasing of late. Some of that is probably due to lower year on year comparisons and price inflation. However, there have been some nice increases on a monthly basis as well, as indicated by the gray lines representing monthly changes.

Let's go to the charts to see what traders think about the retail sector:



On the 5-year, weekly chart we see a pretty tight trading range of 10-15 points. In other words, despite the pretty strong retail sales numbers from above, traders have been lukewarm about the retail sector for the duration of this bull market. That's pretty interesting because the fundamentals would indicate this is a good area of the market.



On the daily chart, notice that starting in July, the market went into a classic bear market chart of lower lows and lower highs. While the beginning of this sell-off in retail coincided with the market's first big subprime hit when Bear Stearns announced massive losses, the index has failed to rally with the market.



The 3-month chart shows the moving average picture. Notice that:

1.) We're below the 200 day SMA.

2.) The 200 and 50 day SMA (longer-term trends) are down.

3.) The shorter term trends are rising.

4.) The SMAs are bunched up, with conflicting short and long-term signals.

Short version: according to traders, retail isn't looking that hot right now. While the shorted SMAs indicate we could be getting a short-term upswing, the long term trend is down.

Retail Sales Were Up, But ....

From the WSJ:

Retail sales increased by 1.2%, the Commerce Department said Thursday. Sales went up an unrevised 0.2% in October.

.....

Excluding gas and auto sectors, demand at other retailers last month increased by a robust 1.1%. Sales climbed by 2.5% at electronic stores; 0.6% at health and personal care stores, 1.0% at food and beverage stores; 1.2% at building material and garden supplies dealers; 2.6% at clothing stores; 0.3% at eating and drinking places; 1.9% at mail order and Internet retailers; 1.0% at furniture store sales; 2.2% at sporting goods, hobby and book stores; and 0.9% at general merchandise stores.

But.....

U.S. retail sales dropped for the second straight week as consumers postponed holiday gift purchases during what may be the worst holiday shopping season in five years.

Sales fell 2.7 percent in the seven days through Dec. 8, following a 4.4 percent decline a week earlier, Chicago-based research firm ShopperTrak RCT Corp. said yesterday. About 12 percent fewer shoppers visited stores last week compared with the same period last year, ShopperTrak said.

Consumers are completing their holiday shopping later than usual, and they're trimming purchases as they pay for $3-a- gallon gasoline and higher food costs. The National Retail Federation in Washington forecast a 4 percent increase in holiday sales this year, the smallest gain since 2002.

``High gas prices and oil costs are definitely taking money out of people's wallets,'' Michael McNamara, vice president of research and analysis at Mastercard Advisors in Purchase, New York, said yesterday.

So -- what is going on?

1.) My guess is the heavy discounting and extended holiday hours over Thanksgiving helped to drive sales and traffic. However, I have to wonder what this will to retailer's margins.

2.) The consumer is now heavily conditioned to expect massive Christmas incentives. In my opinion, retailers have really shot themselves in the foot over the long run by continually offering lower and lower prices and more and more incentives over the holiday season. Consumers are now use to these massive incentives from retailers and consumers will no longer do a big Christmas buy without them.

3.) Let's not forget about gas prices.



Notice that gas prices typically decline after the "summer driving season." However, they haven't done that this year. Instead, gas prices are approximately 70 cents higher this year than last year. That is probably having a negative impact.

4.) Financial market turmoil isn't helping consumer confidence. Remember the Fed lowered interest rates a few days ago and issued a bearish statement with the announcement. In addition, there is continued talk about a credit crunch among lenders.

5.) Housing still sucks. At some point, the decrease in mortgage equity withdrawals and declining home prices will start to seep into consumer sentiment.