I couldn’t believe the headlines this morning:
"Retail Sinks Stocks," "Economy Flirting with Recession," "Sales Languishing," "New Reason for Worry in Manic-Depressive Market."
Well, actually, that last headline is pretty darn accurate—this is just another worry for headline traders, but it shouldn’t be much cause for concern for long-term investors. And while the May retail sales report left much to be desired, the doom-and-gloom crowd have seized on the numbers a little too tightly.
As usual, when you look beyond the headlines, the numbers show a very clear picture. Retail sales declined 0.2% but the major drags on the figure were due to sagging demand for building materials and falling gasoline prices. Does the fact that prices at the pump are putting less of a squeeze on consumers’ pocketbooks really mean that the age of the American consumer is over? I don’t think so.
For one, retail sales still topped economists’ estimates, who expected a 0.3% drop. It is also important to remember that not all retailers are created equally. While gas stations and restaurants were hit this month, sales at clothing stores rose 0.9% while electronics stores reported a 0.8% jump in sales.
This backs up the May same-store sales data released earlier this month—18 major retailers reported that sales rose an average 3.6% in May, including:
- Limited Brands Inc. (LTD), whose 6% sales growth trumped the 4.7% consensus estimate.
- Ross Stores Inc. (ROST), who reported an 8% jump in sales, compared with the 5.2% consensus estimate.
- Target Inc. (TGT), whose 4.4% sales growth topped the 3.5% consensus estimate.
Popular clothiers Saks Inc. (SKS), TJX Cos. (TJX) and Nordstrom Inc. (JWN) also posted better-than-expected same-store sales.
Another thing to keep in mind is that May is typically a weak month for retail sales. In 2011, retail sales dipped 0.1% and in 2010 it dropped 1.1%. The nice thing is that in both of the past two years, retail sales rebounded in the following months, and I expect that we’ll see a similar seasonal trend this time around.
So it just comes to show that it pays to dig a little deeper into these economic reports, especially those dealing with an important economic driver like consumer spending. Despite the headline decline, I am still very confident that the American consumer will continue to drive the economy and that retail stocks are a great way to capitalize on this trend.