There’s been a lot of talk about American consumers early in 2014. And for good reason … it’s not entirely clear how well consumers are doing.
At first blush the macro-economic picture looks pretty good. After all, unemployment has been steadily falling and household wealth is back to where it was before the recession. Consumer confidence is back near post-recession highs too.
But unemployment is still around 6.7%. And while that’s lower than it’s been since the recession started, it’s also higher than it was prior to 2008. You have to go back to 1993 to get a similarly high unemployment rate.
Retail sales in 2013 were also a bit weak. I know sales came in lower than expected at many of the retail stocks I follow, including Best Buy (NYSE:BBY). And preliminary data from the National Retail Federation shows total retail sales growth of just 3.7% in 2013 (excludes autos, gas and restaurants), which is the weakest growth in four years.
The list of downward estimates since July for retail same-store sales (SSS) paints a picture of a conservative consumer. I checked in with Fact Set’s latest data and pulled the following negative revisions:
- Downward SSS revision for Vera Bradley (NASDAQ:VRA) from 0.1% to -14.3%
- Downward SSS revision for Radio Shack (NYSE:RSH) from 1.0% to -5.3%
- Downward SSS revision for Wal-Mart (NYSE:WMT) from 2.0% to -0.4%
- Downward SSS revision for Target (NYSE:TGT) from 2.2% to -1.7%
- Downward SSS revision for Big Lots (NYSE:BIG) from 1.5% to -3.9%
There are pockets of expected strength. A few struck me as somewhat odd, given that the likes of WMT and TGT are expected to contract. For instance, Fact Set’s estimates show expected SSS growth for The Pantry (NASDAQ:PTRY), SUPERVALU (NYSE:SVU) and Safeway (NYSE:SWY). These grocery chains are expected to do better than the more diversified discount retailers.
Home improvement is expected to be strong, too. The Home Depot (NYSE:HD), Lowe’s (NYSE:LOW) and Tile Shop Holdings (NASDAQ:TTS) have all seen increases in their Q4 SSS estimates since the end of July.
Reading between the lines, I see a picture of an American consumer that isn’t quick to part with dollars that they don’t need to spend . . . unless they see those dollars going towards fixing up and/or maintaining assets like homes.
Perhaps this is an oversimplified perspective given the relatively narrow set of data provided above, but nevertheless the pattern seems to hold true even when I look a wider set of SSS data (I don’t have room to include all of it in this article).
Despite this relative weakness in 2013, consensus estimates are for 4.1% retail store growth in 2014. If we can avoid more government shutdowns and get used to the Fed tapering without a major pullback in the market, I do think 4.1% could prove to be conservative. This year’s holiday season was a definite letdown, and I think a repeat performance next year is less likely.
But I’m not overly bullish on retail stocks. Unless there are very specific reasons to own a particular company, like the turnaround effort at BBY, I’m putting the bulk of my money to work elsewhere.
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