Top Gun FP Client Note: No Retail Sales

August 18, 2009 at 11:42 am  ·  Category: Macro Economics, Stocks, Top Gun Financial Planning

NOTE: Every week I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive the Client Note.  You can sign up at the top right hand corner of the website.  Here is this week’s.

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The last few days have brought a bunch of earnings reports from prominent retailers allowing us a window into consumer spending.
 
Last Thursday, the world’s largest retailer, Walmart (WMT), reported a surprising 1.5% drop in same store sales at US Walmarts.  That is only the second drop (the other was -0.1%) I see in my data going back almost 10 years.
 
What does it mean?  I think there are two interpretations of this.  It can be argued that the drop in sales at Walmart is a result of an improving economy.  As the stock, real estate and job markets improve, consumers are feeling better and have more money in their pockets.  As a result, they are trading up, shopping at more expensive retailers instead of trading down to Walmart as they were in the depths of the recession.  The other interpretation is that consumers are under so much pressure that they are cutting back even at discount stores like Walmart.
 
There is an obvious way to decide between these two interpretations.  How are sales at other, higher-end, retailers?
 
This morning, Target (TGT) reported their second quarter earnings.  Same store sales dropped a staggering 6.2% from the year ago period.  Earnings held up pretty well as a result of lower costs of goods.  During the boom years, there was a notable shift among consumers away from Walmart and towards Target.  A classic Wall Street Journal article documented this trend: “Walmart Era Wanes Amid Big Shifts In Retail”, The Wall Street Journal, October 3, 2007, A1.  But that trend has reversed during the great recession and the resulting “Walmart Economy”.
 
Reporting after the close last Thursday, upscale retailer Nordstrom’s (JWN) reported a 9.8% decrease in same store sales for the quarter ended August 1, 2009.  Sales at full line Nordstrom’s stores were off 12.3% but the overall number was helped by a 0.8% increase in same store sales at Nordstrom’s Rack – its discount store.
 
Also reporting last Thursday, Urban Outfitters (URBN), owner of the popular Urban Outfitter and Anthropologie stores, reported a 6% same store sales decline. 
 
The last two days brought weak reports from the major home improvement retailers.  Lowe’s (LOW) reported a 9.5% drop in same store sales resulting in a 19% drop in net income for the quarter ended July 31, 2009.  Home Depot (HD) this morning reported an 8.5% drop in same store sales for the quarter ended August 2, 2009.  Tight expense controls resulted in just a 7% drop in net income.
 
After looking at sales at other retailers, I think it’s safe to say that consumers are not trading up due to a recovering economy.  In fact, the numbers suggest the other interpretation: consumers are under so much pressure that they are now even beginning to cut back at a discounter like Walmart.  Far from showing signs of improvement, the current batch of retail earnings suggest continuing consumer deterioration.
 
Weekly Returns (8/10-8/14)
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DJ Total Stock Market: -0.80%
Top Gun: +0.15%
 
YTD Returns (through 8/14)
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DJ Total Stock Market: +13.71%
Top Gun: +6.78%
 
Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113
 
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