Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Retail Outlook for 2012
The retail sector had an overall positive year in 2011, as sales grew 7.7% compared to the previous year, according to the Commerce Department. The end of the year, however, displayed noteworthy consumer behavior. Many retailers make a large chunk of their income in the final quarter of the year due to the holiday season. At first, it appeared that consumer spending would run the ideal course. Black Friday sales posted a 7% advance over the previous year. Shoppers were determined to get their hands on discounted merchandise, a trend that became clearer once December rolled around.
In December, the Consumer Confidence Index reached its highest point since April. Interestingly, the December retail sales figure was unimpressive, gaining just 0.1% over the previous month. What’s more, excluding the automobile component, sales actually declined 0.2% month to month. The sluggish activity forced many retailers to engage in promotional pricing, which, in turn, put pressure on margins.
In the new year, things appear to be uneven as well. In January, the unemployment rate fell 0.2%, to 8.3%, a three-year low. Non-farm payrolls rose by 243,000, while private-sector employment increased by 257,000.
In terms of consumer spending, January’s total retail sales gained 0.4% over December. Interestingly, despite the uptick in retail sales, the Consumer Confidence Index fell month over month, from 64.8 in December to 61.1 in January. It appears that although consumers are optimistic about the current employment situation, they are more reserved about their personal income, as well as about overall business conditions.
Personal income will likely be affected by a number of factors this year. Numbers relating to gas prices have caused a bit of an unsettled feeling. The cost of fuel is on the rise and tensions between Iran and Western nations may exacerbate the situation.
Gasoline prices increased 0.9% in January, bringing overall consumer prices up 0.2%. Core prices, which exclude food and energy, also rose by 0.2%. Over the past 12 months, however, core prices have grown by 2.3%, a rate that has not been seen since September, 2008. Food costs rose 0.2% in January, and 4.4% year over year.
All told, consumers will likely feel a bit of a pinch from the combined increases, in turn being more conscientious of how they spend their disposable income. In such a case, off-price retailers such as Ross Stores (ROST), Kohl’s Corp. (KSS) and The TJX Companies (TJX), which includes Marshalls, TJ Maxx, and HomeGoods stores, will likely benefit from the more-frugal nature of shoppers.
Though it may provide a boost to these discount vendors, the tightening of the string on the purse may have an adverse effect on other players in the retail world. In lieu of the restricted spending, many regular-priced merchants, such as Talbots (TLB), The Gap, Inc. (GPS), and Chicos FAS (CHS), will probably have to lower their prices or engage in promotional activity. Either route would likely put a strain on profits, constricting bottom lines. Too, many of the companies in the Retail (Softlines) Industry have been faced with higher raw materials costs, which, if continued, would weigh on margins even more.
Department stores, for the most part, will likely also have to engage in some discounting. There are exceptions, however, such as Saks Inc. (SKS) and Nordstrom, Inc. (JWN), which cater to consumers at the higher end of the pay scale. These vendors have remained relatively strong in recent months. The more mainstream merchants, however, will have to take some actions to remain competitive, from a pricing standpoint. This group includes J.C. Penney (JCP), Macy’s Inc. (M), and Dillard’s (DDS).
In summary, we believe consumers will continue to spend this year, but with caution. Bargain-hunting will likely be strong in the first half of the year, and especially during the summer months when gas prices are expected to be at their highest. The back half of the year will hopefully house a stronger retail environment and increased consumer confidence.
Several factors will go into what the outcome will eventually be, including the shaky situation facing the European economy. The resulting consumer behavior ought to be displayed in the performance of the individual companies that the retail world encompasses, as well as in the performance of their stocks.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.