corporate taxes, consumer spending and the stock market

It looks as if the top Federal corporate tax rate will be declining from the current world-high 35% to a more median-ish 20% or so.  The consensus guess, which I think is as good as any, is that this change will mean about a 15% one-time increase in profits reported by S&P 500 stocks next year.

However, Wall Street has held the strong belief for a long time that this would happen in a Trump administration.  Arguably (and this is my opinion, too), one big reason for the strength in US publicly traded stocks this year has been that the benefits of corporate tax reform are being steadily, and increasingly, factored into stock quotes.  The action of computers reading news reports about passage is likely, I think, to be the last gasp of tax news bolstering stocks.  And even that bump is likely to be relatively mild.

In fact, one effect of the increased economic stimulus that may come from lower domestic corporate taxes is that the Federal Reserve will feel freer to lean against this strength by moving interest rates up from the current emergency-room lows more quickly than the consensus expects.  Although weening the economy from the addiction to very low-cost borrowing is an unambiguous long-term positive, the increasing attractiveness of fixed income will serve as a brake on nearer-term enthusiasm for stocks.


What I do find very bullish for stocks, though, is the surprising strength of consumer spending, both online and in physical stores, this holiday season.  We are now nine years past the worst of the recession, which saw deeply frightening and scarring events–bank failures, massive layoffs, the collapse of world trade.  It seems to me that the consumer spending we are now seeing in the US means that, after almost a decade, people are seeing recession in the rear view mirror for the first time.  I think this has very positive implications for the Consumer discretionary sector–and retail in particular–in 2018.

21st century retailing: my trip to Home Depot

This is another mountain-out-of-a molehill thing.

We have Toto toilets in our house.  Toto is the leading brand in Asia and has been making significant inroads in the US over close to two decades.  Yes, they’re the toilets that play music, heat the seat, double as a bidet and make fake urinating noises (a Japanese must)–but we just have plain old toilets.

The other day, I went to the local Home Depot, which, by the way, sells Toto toilets, to get a replacement part for one of ours.  A friendly employee showed me where the replacement parts were–all aftermarket brands, not Toto, but that was ok with me–and which was the right one. The replacement didn’t look much like the broken part, but the employee assured me that it would work.

It didn’t.  And, in fact, in looking back on my trip, the HD employee may, strictly speaking, have only told me that that was all they had.  If so, kind of embarrassing for me, since for most of my working life I was on the alert for verbal gymnastics aimed at papering over problems.

Rather than launch a telephone search for a plumbing supply store in the neighborhood that might carry the part I needed, I found it on Amazon.


Around the same time, I found I needed a replacement part for a Weber grill.  Same story.  HD sells Weber grills, but not replacement parts.  So, after a wasted trip to the local HD store, I ordered from AMZN.


What’s interesting about this?

In the early days of the internet, there was lots of speculation about the “long tail,” meaning that e-retailers like AMZN would make most of their money from selling obscure items that potential buyers couldn’t find in bricks-and-mortar stores.

A great story   …just not the case back then.  Just like bam, online exhibited the “heavy half” phenomenon, i.e., 80% of the business came from 20% of the items.


But maybe the long tail is beginning to come true.  It’s not because weird stuff that no one really wants has suddenly come into vogue.  Instead, I think computer-driven inventory control programs that eliminate slow-moving items from a store’s offerings may have gone too far.  Yes, carrying fewer items has the beneficial effect of requiring fewer employees and less floor space.  But at some point, the process begins to have negative consequences, as well.

For instance, it’s training me not to go to a physical DIY store, so I’m not passing by enticing end cap displays or being tempted by the sparkly high-margin junk arrayed along the checkout line.


My experience as an analyst has been that any cost-control measures always seem to go too far.  They work for a while, but the continual application of the same process somehow eventually ends up creating the opposite of the intended effect (yes, experience has made me a Hegelian, after all).  This may be what is starting to happen with inventory control programs that retailers use.

If I’m correct, this is another plus for AMZN.


21st century retail: my trip to Rite-Aid

I went to Rite-Aid the other day to get some Aleve.  I was away from home, in a rural area more than 100 miles from the nearest Costco, and not at a place where I could get same-day delivery from Amazon (270 Aleve tablets for $18 ($0.07 each).

I had several choices:

–100 generic (naproxen sodium) tablets for $9 ($.09 ea.),

–200 generic for $14 ($.07 ea.)

–100 Aleve for $11  ($.11 ea.),

–200 Aleve for $20 ($0.10 ea.), or

–270 generic for $14.50 ($0.05 ea.).

I took the 270.

What really struck me was the fact that I got the final 70 tablets for a total of $0.50.  That’s $0.007 each.  Assuming that Rite-Aid wasn’t paying me to cart them away, the most it could have paid for the tablets was $0.007 apiece.  Multiply by 270 and you get about $1.90.

Doing the analysts’s mountain-out-of-a-molehill thing, and assuming Rite-Aid buys from the manufacturer, I conclude that $1.90 is the most it could have paid for the container of tablets I bought.

The $12.60 that remains is the cost of packaging, distribution, promotion …plus profit.  (Overall, Rite-Aid isn’t making money, even though it has a positive gross margin of about 22%.  SG&A pushes it into loss, so delete “profit” from the packaging… list.)

That Rite-Aid can’t make money despite a 600%+ markup says a lot about the company.  But it also says something about bricks-and-mortar retail, the way Rite-Aid gets its products in front of customers.

This is the AMZN success story in a nutshell:  all it has to do is deliver a $2 item to a customer and spend less than $12.60 to do it.


My trip to Home Depot tomorrow.








thinking about retail: Dicks Sporting Goods (DKS)

DKS reported disappointing earnings Monday night.  Its stock dropped by 23% in Tuesday trading.  So far this year it has lost 49% of its value, in a market that’s up by 10%.  …this in spite of the bankruptcies of rivals Sports Authority and Gander Mountain, which should arguably have cleared the way for better results.

The obvious culprit here is Amazon (AMZN).

I’m sure that AMZN is a factor.  On the other hand, although AMZN is growing at 4x the +5% rate of annual expansion of sporting goods sales in the US, the online giant represents only about 4% of the total sporting goods market.  DKS alone is 50% bigger–and its bricks-and-mortar competition has shrunk considerably.  So online can’t be the whole story.

I think two other general factors are involved:

–Millennials vs. Boomers, with DKS, to my mind, clearly oriented toward Baby Boomers’ tastes.  This issue here is that although Boomers have more money than Millennials, their star is waning as Millennials’ is rising.

–a “normal” business cycle.  During most time periods and in most parts of the world, in my experience, consumers are constrained in their buying by the limits of their income.  As new households form and families rent/buy a residence, rent/mortgage and, sooner or later, things like furniture become significant purchase categories.  This means less money for other purchases–like new golf clubs.

From the late 1990s through 2007, however, that wasn’t the case. Universal availability of home equity loans enabled consumers to avoid budgeting and prioritizing purchases.  So the typical pattern of contraction in some retail categories while housing-related, expands was absent for an extended period.

Now it’s back.  My sense is Wall Street has yet to catch on.

As an investor, I’m not particularly interested in the sporting goods category.  But I think the pattern I see here isn’t an isolated phenomenon.  If I’m correct, we should be doubly careful of any traditional retailer.



continuing apparel retailing woes

I haven’t been watching publicly traded apparel retailers carefully for years.  For me, the issues/problems in picking winners in this area have been legion.  There’s the generational shift in spending power from Baby Boomers to Millennials, the move from bricks-and-mortar to online, the lingering effects of recession on spending power and spending habits.  And then, of course, there’s the normal movement of retailers in and out of fashion.

I’m not saying that retail isn’t worth following.  I just find it too hard to find solid ground to build an investment thesis on.  Maybe the pace of change is too rapid for me.  Maybe I don’t have a good enough feel for how Millennials regard apparel–or whether retiring Boomers are using their accumulated inventories of fashion clothing rather than adding to them.

Having said that, I’m still surprised–shocked, actually–at how the current quarter for apparel retailers is playing out.  It seems like every day a new retailer is reporting quarterly earnings that fall below management guidance, usually the latest in a string of sub-par quarters.  That itself isn’t so unusual.

But the stocks react by plummeting.

You’d think that the market would have caught on that Retailland is facing structural headwinds.  Or at least, that the retail area that made the careers of so many active managers over the past twenty or thirty years doesn’t exist any more.


Is it robot traders?  Is it an effect of continuing buying by index funds?  I don’t know.  But the continuing inability of investors to factor into stock prices the continuing slump of apparel retailers is certainly odd.

disappointing 4Q16 sales for Target (TGT)

TGT just announced that its 4Q16 sales (the fiscal quarter ends in about two weeks, on January 31st, which is normal retail practice) will fall below its previous estimate of +1/- 1%.  The company now figures that sales will be down by -1.0% to -1.5%.

Online sales grew year-on-year by 30%+ during November/December, while sales in physical stores fell more than -3%.

In its press release, TGT also gives a breakout by major categories.

The company doesn’t say explicitly what the split is between online and physical store sales, but a little arithmetic will will get an approximate figure.  And that’s the core of the company’s sales growth problem, in my view.

The Commerce Department hasn’t yet released its calculation of the percentage of retail sales in the US that occurs online.  We can safely assume, though, that the number–which continues a steady upward march–will be around 9%.  This is the portion of overall retail that’s growing, and carrying the waning physical store business.  The TGT online figure, in contrast, is just slightly over 1%.

the trouble(s) with the luxury goods industry

For most of the past quarter-century, the publicly traded luxury goods industry, both companies based in the EU and in the US, has been a source of almost continual outperformance.

the old pattern

Its appeal rested (and I do mean the past tense) on two major trends:

–the gradual aging of the working population in the US and EU.  A twenty- or thirty-something in either area typically aspires to own a work wardrobe, a car and a house.  A forty- or fifty-something, in contrast, wants to own jewelry and a vacation house, and to go on a cruise.

So the rising affluence of older workers in the US and Europe has meant increasing demand for luxury goods.

–growth in Japan and the development of capitalism in China, beginning with Deng’s turn away from Mao in the late 1970s.  Again, increasing affluence has sparked higher demand for globally recognized luxury goods.  In addition, in China “gifts” (read: bribes) of luxury goods have long greased the wheels of bureaucratic approval of new projects–until the ongoing anti-corruption crackdown there began a few years ago, that is.

What has been less well understood is that the unit profits from selling a given luxury good in either China or Japan has been much, much higher than elsewhere (double would be my first approximation).  This means that if Japan/China accounted for 25% of a company’s sales (and a sales figure would typically be all a luxury goods firm would announce), they would represent half the company’s profits.

the new

–the rise of Millennials (the suit, car, house people) in the US and EU and the gradual retirement–and loss of income–of Boomers are putting a crimp in demand for luxury goods in these areas.

–luxury goods sales in Japan have hit a brick wall in recent years.  This is partly demographics, partly the immense loss in purchasing power that the Abenomics-induced depreciation of the yen has caused.

–the China case is a little more complicated.  The main reason for the falloff in Western luxury goods sales there is, of course, the anti-corruption campaign.  But even before this, there was a clear trend of high-end consumers in China away from foreign luxury brands and toward domestic ones.   It also seems to me that years of economic stagnation in the EU have further undermined the image of European brands as cultural symbols of power and influence.  So my guess is that even as/when the anti-corruption campaign runs its course, the bounceback of traditional European luxury goods sales will be muted.

my bottom line

Studying stock performance patterns of the past twenty or thirty years suggests that major selloffs of luxury goods stocks are always buying opportunities.  I don’t think this will be the case any longer.   This is not to say the stocks won’t go up in market rallies.  They likely will.  Bur they won’t be leaders.   And the best-known names will lag firms that primarily serve Millennials, as well as companies that tap into growing consumption in China.