Updated March 28 at 1:28pm

Consumers save less to fuel U.S. sales as stocks may lag


NEW YORK - Retail stocks may underperform the market because consumers are financing spending partly by saving less, which might be unsustainable as unemployment remains stalled around 9 percent.

Retail sales rose 0.5 percent in October from the prior month, according to data from the Census Bureau, beating the estimate for a 0.3 percent increase in a Bloomberg News survey. Meanwhile, Americans saved 3.6 percent of their disposable personal income in September, the lowest in almost four years, based on Bureau of Economic Analysis data.

“While this could help boost the holiday-sales season, it’s a new stress point for consumers that raises doubts about the sustainability of spending in 2012,” said David Strasser, a New York-based analyst at Janney Montgomery Scott LLC. He maintains “neutral” ratings on Target Corp. and PetSmart Inc.

Investors may “look past” the better-than-forecast results because recent declines in the saving rate and in real disposable income are “warning signs that consumer fundamentals are weakening,” said Samer Nsouli, chief investment officer of Lyford Group International in New York, which oversees about $80 million in assets.

“Retail stocks could be setting up for a repeat of last year, as these weakening drivers of spending suggest recent gains may be temporary,” he said.

Investors were concerned in 2010 that retailers’ margins might fall because of rising costs for materials, Nsouli said. The SPDR Standard & Poor’s Retail Exchange-Traded Fund peaked on a relative basis Nov. 26, 2010 -- Black Friday, the day after Thanksgiving and one of the year’s biggest shopping days -- and then underperformed the S&P 500 ETF by 10 percent through Jan. 31, 2011.

Rising ETF Shares

The retail ETF -- which includes Wal-Mart Stores Inc. and Macy’s Inc. -- has risen 12 percent since Jan. 31, compared with a 4 percent loss for the S&P 500 ETF.

Consumer spending may be limited in 2012 by “longer-term fundamental constraints,” such as weak disposable income, said Robert Dye, chief economist at Comerica Inc. in Dallas. Money left over after taxes, adjusted for inflation, has fallen 0.3 percent this year to the lowest since September 2010, Bureau of Economic Analysis data show.

The prospect of tighter bank credit also suggests a slowdown in retail-sales growth by March 2012, said Dan Binder, analyst at Jefferies & Co. in New York. The net percentage of banks reporting increased willingness to make consumer- installment loans, which include credit cards, dropped to 18.8 percent in October after reaching a 17-year high of 28.8 percent in April, according to a Federal Reserve senior loan-officer survey released this month.

‘Trickle-Down Effect’

There’s a “trickle-down effect,” because banks’ willingness to make these loans is a leading indicator of retail-sales growth, said Binder, who maintains “hold” ratings on Costco Wholesale Corp. and Kohl’s Corp. The correlation between these data is 0.88, according to his calculations. A correlation of 1 would show they move in lockstep, while a value of zero signals no relationship.

A lower saving rate has helped Americans spend more than they earned in the past; doing so now likely will put them in “vulnerable positions,” particularly as the labor market has a long way to go to improve, Dye said. Unemployment, which fell to 9 percent in October from 9.1 percent in September, has been at or above this rate for 28 of the past 30 months.

Consumers are prone to dip into savings to spend on holiday shopping, and this year is shaping up to be “pretty aggressive,” Strasser said. Still, when credit-card payments come due, the “January hangover” may be more severe if consumers can’t pay their bills, he said.

‘Concerned About Jobs’

Wal-Mart’s “customers remain concerned about jobs,” as they juggle credit cards, use coupons and forgo eating out and vacations, CEO Mike Duke said on a Nov. 15 conference call. “There is a real sense that the economic strain is taking its toll.”

The world’s largest retailer said its traffic declined from a year ago in the three months ended Oct. 31.

“It continues to be a difficult consumer environment, and this was evident in mall traffic during the period, which was down 2.4 percent,” J.C. Penney Co. Chairman Myron Ullman said on a Nov. 14 conference call. The decline hurt the Plano, Texas, retailer’s performance, as comparable-store sales fell 1.6 percent in the three months ended Oct. 29, Ullman said.

Loyalty-Reward Program

Similarly, Target is bracing for shoppers “to continue to spend cautiously” heading into what’s likely to be an “extremely competitive” fourth quarter, Kathryn Tesija, executive vice president of merchandising, said on a conference call yesterday. The Minneapolis-based company hopes a 5 percent loyalty-reward program will give customers “an even greater deal,” she said.

Target sees some relief in 2012, even as “consumer spending will likely continue to be soft and uneven,” CEO Gregg Steinhafel said Wednesday. That’s because it projects the costs of materials will moderate and the company “will experience far less inflation” than this year, he said.

Other retailers also may benefit from lower input costs, said Charles Grom, a New York-based analyst at Deutsche Bank AG. If they feel less pressure to raise prices, it may be good news for investors concerned about the industry’s ability to pass through higher costs to a “more value-conscious consumer,” he said.

Falling Cotton Prices

Cotton prices -- one of the primary materials costs for retailers -- have fallen 27 percent since peaking at $1.4197 a pound in April, based on the December 2011 futures price, Bloomberg data show.

“A deceleration in apparel inflation would be a very welcome sign for investors because retailers’ profit margins may benefit in the second half of 2012,” said Grom, who has “buy” recommendations on Macy’s and Nordstrom Inc.

The competitive price environment that Target and other retailers are anticipating may lead to strong volume gains for these companies, said Binder of Jefferies. Still, “signs of stress” such as the declining saving rate, already are evident, which is why “the problem may come after the holidays,” he said.

“The consumer is not invincible,” Binder said. “The relative outperformance of these stocks could be challenged from here.”


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