PMC Weekly Review - November 13, 2015

A Macro View – The Retailer Struggle Puzzle

The macroeconomic environment for U.S. retailers could not be better in 2015. After plunging in 2014, crude oil and gasoline prices continue to drop, a gift that keeps on giving. The job market improved markedly, as the unemployment rate declined to 5.0% in October, a seven-year low and essentially signals full employment. Even the stubbornly sticky average hourly earnings jumped 2.5% year-over-year in October, its fastest growth pace in six years, after hovering around 2% for nearly a decade.  
However, most retailers are struggling, posting either flat or negative comp sales, accompanied by falling stock prices. The SPDR S&P Retail ETF (XRT), an ETF that tracks over 100 retailers from department stores to apparel retailers to internet retailers, has declined 6% YTD (as of the close of 11/12/15), after registering strong gains annually since 2009. Recently, many of the nation’s best known retailers, including Walmart, Macy’s, and Nordstrom, reported poor sales numbers and issued disappointing guidance, and their stock prices plunged. What is wrong?  Have the economy and job market really improved?
First and foremost, both the economy and employment indeed have improved—no doubt about it. That improvement is raising consumer confidence: they are spending their money on big-ticket items, like autos and housing, which is “cannibalizing” their spending on traditional retail items, such as clothing. For example, aided by low gasoline prices and cheap financing, the U.S. auto market is sizzling: October auto sales reached 18.12 million SAAR (seasonally-adjusted-annualized-rate) units, a 10-year high. Ironically, economic and job market strength appear to be hurting traditional retail sales (be careful what you wish for)!
Second, consumers have changed their spending habits: they are more willing to spend money on “experiences”, such as dining and travelling, rather than on “things”, such as clothes and furniture. Cruise lines, theme parks, restaurants, etc. are benefitting from this trend (and a stronger economy and job market).
Finally, weather matters. This fall has been unseasonably warm, and that hurts retailers, since consumers aren’t motivated to shop for warm clothes at the mall. It also drags down sales of other retailers—consumers might have made purchases from them during the same trip. Fall’s slow sales may weaken holiday-season sales as retailers slash prices to move inventory. Although weather could be an excuse used by incompetent management, it has a crucial impact on the retail industry, especially in the fourth quarter, when seasonal concentration drives its business model.
The macroeconomic environment remains positive for retailers, and they should benefit from the tailwinds of an improving economy and a strong job market. Sales of big-ticket items eventually will cool, and consumer cash again will flow to traditional retailers. However, as we’ve seen in online shopping, spending habits are gravitating toward “experience consumption”. Traditional retailers must learn both to adapt to and capitalize on that secular trend. Retail is a competitive industry, and only those retailers who meet new challenges by adapting their responses to them are destined to succeed.       

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