Retailers...Just Hit a Pot Hole!

pothole with rain puddle

Coming off of a spectacular jobs report in the previous week, we should be seeing some pretty strong numbers from the US retail sector. It's pretty easy to argue more people working would support more people spending. After all, 70% of the economy is driven by consumption.[i]

components of GDP in US

Shockingly, early data from numerous retailers suggests that the “jobs equals spending” picture is not as clear as one would like.

Here are some recent retail highlights:

Bob Evans Restaurants:

  • 2014 Q4 GAAP earnings per share (EPS) were 61.9% lower than in 2013 Q4. Same store sales were down 4.1%.[ii]
  • CFO Mark Hood said, "Consumer confidence continues to be adversely impacted by ongoing macroeconomic headwinds, including health care costs and unemployment, which disproportionately affects lower- and middle- income consumers.”[iii]

The Container Store:

  • 2015 Q1 EPS were negative and missed estimates by 20.7%.[iv]
  • CEO Kip Tindell said, "Consistent with so many of our fellow retailers, we are experiencing a retail 'funk'."[iii]

Lumber Liquidators:

  • 2014 Q1 EPS missed estimates by 20.8%. Demand improvement in mid-March did not carry into May, and June weakened further.[iii,iv]
  • CEO Robert Lynch said, "Our reduced customer traffic has coincided with certain weak macroeconomic trends related to residential remodeling, including existing home sales, which have generally been lower in 2014…"[iii]

Family Dollar Stores

  • 2014 Q3 EPS missed estimates by 4.4%.[iv]
  • CEO Howard Levine said, "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment."[iii]

The Gap

  • June same-store sales declined 2% year-over-year.[iii]

So how is it that the jobs picture is improving and consumers are not spending with any aggressiveness?[v]

monthly change in nonfarm payrolls

Perhaps it's all the part-time workers being absorbed into the workforce?[vi]

employed part time chart

Perhaps it's the increased cost of healthcare being absorbed by Americans.[vii]

cost of healthcare over time

Regardless of the cause, without a strong consumer in Q2 we might be in for a bit of a surprise. The good news for Q2 is that earnings expectations are at some of their lowest levels since March. According to Zach's Research analysts are only expecting S&P 500 companies to grow earnings by 2.9% during Q2.[viii] Certainly there is plenty of room to be pleasantly surprised.

In the coming weeks, keep your eye on these consumer-oriented companies (VF Corp, Columbia Sportswear, Mattel, McDonalds, Hasbro) to get a little more clarity on the consumer and be prepared for a bit of a bumpy ride.

If you have questions or comments, please let us know as we always appreciate your feedback. You can get in touch with us via Twitter, Facebook, or you can email me directly. For additional information on this, please visit our website.

Tim Phillips, CEO – Phillips & Company

Jeff Paul, Senior Investment Analyst – Phillips & Company

References

[i] JP Morgan Asset Management. (July 2014). Q3 Guide to the Markets. Economic Growth and the Composition of GDP. p 17.

[ii] GlobeNewswire. (Jul 8, 2014). Bob Evans Reports Fiscal 2014 Fourth-Quarter and Full-Year Results; Updates Fiscal 2015 Outlook. Yahoo Finance.

[iii] Udland, M. (Jul 11, 2014). Retailers Have Given Some Discouraging Commentary About The US Economy To Start Earnings Season. Business Insider.

[iv] Bloomberg LP. Quarterly Earnings Data.

[v] Weisenthal, J. (Jul 3, 2014). CHART OF THE DAY: Here’s the Chart Obamacare Critics Don’t Want You to See. Business Insider.

[vi] Federal Reserve Economic Data. Employed, Usually Work Part-Time.

[vii] Alvarez and Marsal. (Mar 27, 2014). Consumers Passing Threshold of Healthcare Affordability.

[viii] Mian, S. (Jun 26, 2014). Mixed Start to Q2 Earnings Season. Zacks Research.