Just how healthy is consumer spending? That’s the question investors are hoping to have answered later this week when Wal-Mart Stores Inc. reports its results for its fiscal second quarter.
Uncertainty surrounding the consumer translates to macroeconomic anxiety, since consumer spending makes up more than two-thirds of economic activity in the United States. That’s why – after a crushingly disappointing batch of same-store sales reports in June and an adequate if unspectacular crop in July – all eyes will be on the granddaddy of all retailing stocks when it tells the world just how well it did.
By at least one measure, Wal-Mart is already a winner, having outperformed the S&P 500 handily over the past year, up about 50 percent while the S&P’s gains have been less than half that. Indeed, many retailing stocks have fared better than the broader market, ranging from Target and Costco, to Gap Stores.
Some, like luxury retailer Saks, may be trading beneath their 52-week highs, but are still outpacing the broader index. Only a handful of relative basket cases – like beleaguered J.C. Penney – have been humiliated by trailing the market and witnessing their shares lose ground in both absolute and relative terms.
J.C.Penney’s snafus may well be helping to propel Wal-Mart to fresh heights. Under the new leadership of Ron Johnson, J.C. Penney has abandoned its strategy of offering discounts and appealing to cash-strapped consumers. Instead, it claims to offer everyday low prices and is undertaking a complete makeover of everything from store design (look for more in-store boutiques) to designer merchandise (taking a leaf out of Target’s book, it is wooing brand-name designers).
But so far, this doesn’t seem to be working out terribly well, above all for investors. In May, J.C. Penny “suspended” paying dividends; last Friday, it announced a loss of 67 cents a share, nearly treble what analysts had been anticipating. Same-store sales nosedived an astounding 22 percent in an environment where other retailers had been reporting gains, albeit of the modest single-digit variety.
Soothing words from Johnson, a former Apple exec, helped stem the bloodletting in the stock market on Friday, but the outlook is still gloomy, with analysts raising an eyebrow at the mere idea of recommending the company’s shares.
While J.C. Penney has lost its old clientele by abandoning its discount program, Wal-Mart may be picking up some of them by emphasizing its own newly revived “Everyday Low Prices” core message, suggests Jharonne Martis-Olivo, retailing industry analyst at Thomson Reuters. Those former Penney loyalists may well be fueling Wal-Mart’s gains in same-store sales, which have seen improvements for the last five quarters.
Can this continue? Martis-Olivo is only one of a growing number of analysts who are wary about the future prospects for retailers. So far, they appear to have dodged the bullet. Consumer spending weakened significantly in the second quarter of the year, resulting in only a 1.5 percent gain in GDP.
Election-year uncertainty – coupled with that ominous-sounding “fiscal cliff” – makes for an even trickier backdrop for retailers. Some are beginning to feel the pain. Recently Coach announced a sharp drop in same-store sales to levels about a third of what the market had been anticipating, demonstrating that consumer appetite for designer handbags with high-end price tags appears to be waning. The company blamed consumer confidence for the sluggish growth – or rather, the absence of consumer confidence.
In the absence of a positive macroeconomic backdrop, retailers need to be lucky. Yes, parents will still shop for necessities for their kids as the latter head back to school or off to college. But in what Martis-Olivo has described as the worst youth employment market since the Beatles first set foot in North America in 1964, they’re footing a majority of the bill, and paying more only because prices are higher, not because they are feeling affluent and generous. There are few incentives for anyone of any age to go on a shopping spree at present.
That’s where the luck comes in. “If retailers want to succeed in the upcoming season, they should not only have compelling fashions but also offer apparel that will match the season’s weather,” Martis-Olivo argues. If that sounds tricky, you’re right. If we head into a warmer-than-normal autumn and retailers are showcasing their woolly sweaters or even lightweight jackets, well, that’s going to be a recipe for trouble in September.
On the other hand, a retailer who gets it right needs to nail not only the trend (is the Gap right in betting that the passion for colored denim will extend into fall, with brightly-hued jeans leggings with ankle zips becoming the latest fad?) but have 20/20 foresight when it comes to the weather.
Back-to-school shopping will help swell retailers’ coffers for the next few weeks, but the picture may get a bit gloomier as we head toward the end of the year and the holiday season, during which they collect the bulk of their sales and profits. The good news for investors who are anxiously awaiting Wal-Mart’s results? Its pledge to deliver low prices is the kind of refrain that investors want to hear, and any of them humming that song – like discounters TJX and Ross Stores – may well find their commitment to slashing prices to the bone rewarded in the face of growing market share.
Betting on the consumer is becoming a bit of a tricky game, but if you feel compelled to play it, put your chips on these “low prices, every day” retailers who aren’t trying to figure out ways to reinvent themselves at what may prove to be a critical turning point in the economy.
