Thanksgiving weekend shopping reaffirms a recovering US consumer

the National Retail Federation survey…

The National Retail Federation released the results of its annual Thanksgiving weekend shopping survey, consisting of interviews of 4300+ consumers, yesterday.

The headline results are:  bigger crowds, $45 billion spent–up about 9% year on year.

The actual survey results, also available on the National Retail Federation site linked to above, contain more interesting information, namely:

–people traded up.  Shopping at discount stores dropped from 34.2% of the respondents in 2009 to 40.3% this year.  In contrast, department store shopping rose from 49.4% to 52.0%, and specialty retail store patronage grew from 22.9% to 24.4%.

–the types of gifts shifted from necessities to discretionary items.  For example,

—–14.3% of respondents said they bought jewelry last weekend vs. a low of 9.6% in 2007, 10.9% in 2008 and 11.7% in 2009

—–33.6% bought books, CDs, videos or video games vs. 41.7% in 2007, a low of 39.0% in 2008 and 40.3% in 2009

—–24.7% bought gift cards/certificates vs. 21.0% in 2007, a low of 18.7% in 2008 and 21.2% in 2009

—–of economically sensitive spending areas, only housing-related (home decor and furniture) is a significant laggard.  Among survey respondents, 20.2%  are spending on this category this year vs. 19.6% in 2007, 20.3% in 2008 and 19.9% in 2009.

–a third of all purchases, by dollar value, were online, with 33.6% of respondents saying they had shopped on the internet.

Many news sources, the New York Times, for example, are reporting that shoppers were also buying things for themselves rather than just holiday gifts for others.

…adds to the evidence of a healthier consumer

Over the past several days, other positive consumer indicators have been announced.  Last week, the Labor Department reportedThe Thompson Reuters/University of Michigan survey of consumer confidence hit a five-month high, although the release itself makes for pretty dismal reading.  While respondents may be feeling more secure now than for almost half a year, they expect the unemployment rate to stay high and salary increases to stay low.

investment implications

For a long time, I’ve been writing that I think that the recovery of the US economy this time around would follow the pattern of the rest of the world (that is, industry improves first, consumer second) rather than the shape it has invariably had in the past, at least throughout my investment career (that is, consumer first, industry second).

Recent data, and especially the NRF survey, seem to me to be in accord with my view.  I read them as saying that finally, almost eighteen months after the economy low, the US consumer is beginning to perk up again.

Ex discount stores like WMT and TGT and home improvement outlets like HD and LOW,  this suggests retailers with significant US exposure may be becoming more profitable than the consensus expects.  Stocks whose main virtue is that the vast majority of their sales are outside the US, in contrast, may begin to lose their allure in Wall Street’s eyes.

It’s relatively easy to check any stock’s geographical revenue breakout (and maybe operating profit, as well, depending on the company).  It should be in the firm’s annual 10-K filing with the SEC, available on the agency’s Edgar website.

WMT, DIN: more signs of a stabilizing/strengthening domestic economy

the data

–WMT reported earnings before the New York open this morning.  While comp store sales in the US were down for the third fiscal quarter (ends in October), the company has seen sequential improvement in year over year comparisons for the past several months. And it expects comps to turn positive over the holiday season.

–DIN (Dine Equity, parent of Applebee’s and the International House of Pancakes) reported September quarter earnings on November 2nd.  On of the most striking aspects of the recent recession (to me, anyway) has been the reversal of a decades-long trend of American consumers away from preparing/eating meals at home in favor of take-out and eating in restaurants.  Applebee’s, which DIN acquired in 2007, had its comps turn negative in 2006–and stay there.  But third quarter comps for company-owned stores were +3.3%.  Franchisees’ were +3.8%.

It’s not just Applebee’s.  According to the Financial Times, a trade source, the Knapp Track Report, shows the casual dining industry has been comping positive for about four months.  This is the first time since 2006 this has been happening.

–ATVI recently released its latest enter in the Call to Duty series, named Black Ops.  Black Ops had sales of $360 million in the US and UK during its first day (5.6 million copies).  That’s a video game record, and about 20% higher than first-day sales of the mega-hit Call of Duty:  Modern Warfare 2, which was last year’s entry.  Gamers tell me MW2 is the better game.  What’s changed is the economy.

–In its recent earnings call, DIS reported that bookings for its theme parks and resorts were up 5% year on year so far in the fourth quarter, at rates that were 5% higher than a year ago.  It’s a small thing, but higher room rate normally produces lower occupancy, as DIS’s results over the last year illustrate.  The idea is to trade the two variables off against one another in a way that makes revenue (rooms sold x room rate) the highest.  It’s a significant sign of strength when both metrics are moving up at the same time.

what this means

From early in the year, it has been clear that affluent Americans were beginning to feel their jobs were secure and that they could begin to spend a little more freely than they did in 2009.  In fact, sales of luxury goods have been surprisingly strong in the US recently (see my posts on the annual Bain luxury goods report).

These data suggest that everyday Americans have been adopting a similar, more positive outlook–probably starting in the summer.  They’re signs that people think their jobs are safe, that layoffs in their firms are at an end.

This conclusion is reflected in the latest Employment Situation report from the Department of Labor Statistics, which shows the US added about 159,000 private sector jobs in October, and which revised up the August and September figures to 143,000 and 107,000–a gain of 93,000 for the two months over the prior month’s estimate.

It seems to me the evidence points to the US having reached an inflection point where the economy is beginning to heal itself.  Slowly, it’s true, but healing nonetheless.  I’d read the 7%-8% drop in the 30-year bond over the past two weeks as the start of the process of normalization of interest rates, a process that will go on until the 30-year bond yields over 5% and the 10-year yield breaks through 4%.

For stocks, the situation will likely be more complex.  In the past, stocks have held up well during the post-crisis transition period (see my post from April on this topic). The critical question this time around, though, is what individuals do with the mammoth amount of money they’ve poured into bond funds over the past few years.  Do they simply stop allocating money to bonds for a while?  or do they actually withdraw funds?  Where does this money go?  I presume it makes its way into stocks.

Wal-Mart’s 2Q2011: strong abroad, still suffering from recession in the US

the results

WMT reported 2Q2011 (fiscal 2011 ends January 2011) before the market open in New York yesterday.  The company earned $.97 a share, up 9% vs.  $.89 a share achieved in the same period of the previous fiscal year.  That was a penny ahead of the Wall Street consensus.  The company raised its full year earnings guidance by $.05 to a range of $3.95 to $4.05.  (2Q2010 was originally reported as $.88, but the installation of a new SAP management control software system has given WMT better knowledge of its inventories, resulting in the restatement.)


Three-quarters of WMT’s revenues come from the US.  The other quarter of the firm’s sales, along with virtually all its growth at present, comes from abroad.  The company is very strong in Mexico, and is expanding rapidly in Brazil and China.

Overall sales for the three months for Wal-Mart US were flat for the three months ending July, same store sales down 1.8% and operating incoe doan .2%.

Sam’s Clubs’ sales were up 2% for the July quarter, same store sales (ex fuel) up 1% and operating income up 2.4%.

International sales were up 11% and operating income up 16.8% (on a constant currency basis, both figures would have been about 4 percentage points lower).  Same store sales were up about 6% in China and 3% in Mexico and Brazil.  Japan and the UK were up slightly.

It seems to me that this general picture, aided by cost control, will continue at least for the rest of the fiscal year.

Since Wal-Mart is such a dominant factor in retail in the US, and because about a third of its customer base consists of lower middle class shoppers, Wal-Mart’s US results give some insight to the economic condition of ordinary American residents.

a Wal-Mart’s-eye view of the US

Wal-Mart reported that its business exited the quarter stronger than it began the three months and the traffic was improving sequentially.  But the image the company reveals of its customers’ buying tendencies–Wal-Mart has superb information systems–is one of continuing struggle.

For example, many customers are living paycheck to paycheck.  So Wal-Mart sees a surge in sales on payday, followed by a gradual tailing off until the next paycheck is issued.  Use of food stamps and other forms of government assistance is rising.  Use of the company’s check-cashing services is up by more than 10%.  Credit card usage, now at 15% of sales (30% is about average for retail overall), continues to fall.

Grocery sales are up.  Baking and cooking supplies are, too, as more people shift from eating out to preparing meals at home.  Apparel sales (never a Wal-Mart strength) are down, as are home goods and appliances and electronics.  In other words, necessities are in, discretionary purchases are out.

This may not be a strictly apples to apples comparison.  Wal-Mart performed relatively well during the worst of the recession, helped in part by shoppers trading down from more expensive stores.  Industry evidence is that many of these customers have begun to trade up again.  Still, it’s clear that many Wal-Mart customers are having a very rough time.

Last year, apparently in a bid to woo more affluent customers, Wal-Mart tried two experiments.  It cleared its normally crowded aisles and reduced the number of items sold in many categories–apparently to give a more Target-like look.  It also increased advertising.  Neither experiment worked.  So the company is increasing assortments again, delegating more merchandising authority to local managers and stopping the extra advertising.

On the positive side, Wal-Mart says that after its success in entering the Chicago urban market it has been contacted by a number of large cities asking the company to do the same for them.

the stock

WMT (I own it) is trading at under 13x earnings and yielding 2.4%.  It is generating free cash flow of over $4 billion a quarter and has used $7 billion of that in the first half to buy back stock.  the earnings growth rate should gradually improve, both as international operations become a large part of the whole and as the economy rebounds from the current cyclical low point for Wal-Mart customers.  For an income-oriented investor, I think WMT is way better than a government bond–admittedly more volatile–but way better.

Wal-Mart is expanding in Chicago: a big plus?

The original, very successful, Wal-mart concept was to open general merchandise stores on the outskirts of towns with a population of 250,000 or less.  These Wal-Marts offered a combination of one-stop shopping and low prices that small local merchants found impossible to match, let alone beat.

As the small town market matured, Wal-Mart gradually shifted to opening supercenters, which combined a supermarket with the general merchandise store and put Wal-Mart in direct competition with the big domestic grocery store chains for the first time.  The supercenters have been as dramatically successful as the original Wal-Marts were in their day, both in terms of increased profits for WMT and forced restructuring for the supermarkets.

I remember attending a retail conference some years ago where a major supermarket chain was talking about its successful adaptation to Wal-Mart’s entry into its markets.  The spokesman admitted that his stores experienced a dramatic drop in revenues in the initial years.  But, he said, by resigning the store layout and refocusing the merchandise mix toward more upscale and specialty items his company was able to restore revenues to the pre-Wal-Mart level within about three years.  A hand in the audience went up immediately.  “What about profits?”  (I’m not sure whether the questioned was short the supermarket stock or just annoyed at what he considered the speaker’s duplicity.)  The speaker’s reply is that his firm got profits back up to half what they were before Wal-Mart’s arrival.

This dynamic–good for consumers, bad for incumbent supermarkets–is well-known.  Wal-Mart has been unstoppable in most rural or suburban areas, where land is abundant/cheap and people are used to driving to shopping areas.  California, New England and big urban areas like Chicago and New York have been another story.  In New England, there’s the serious issue that store locations are hard to find.  In California and the big cities, on the other hand, supermarkets have been able to muster powerful political support to prevent inroads from Wal-Mart.

In the New York area, where I live, Wal-Mart has recently been running TV ads that say that the average shopper who uses a newly opened Wal-Mart will likely save over $3000 a year on food and general merchandise.  Even shoppers who don’t will lay out more than $1500 less than if there were no Wal-Mart (presumably because increased competition forces other merchants to lower prices).  But that cuts no ice around here.

Chicago is an interesting example.  The first Wal-Mart opened there in 2006.  According to Reuters, after the City Council rejected attempts to saddle Wal-Mart with punitive operating restrictions, “unions helped defeat several pro-Walmart aldermen in Chicago’s 2007 elections.”

Until recently, that’s been the end of the Wal-Mart story in the Windy City.

What’s changed?  The financial crisis-induced recession, for one thing.  WMT has also become more flexible in its approach to store formats.  And it has become more politically savvy.  Its current approach is to position itself, along with local community leaders, as bringing jobs to blighted urban areas and fresh food at reasonable prices to neighborhoods abandoned by traditional supermarkets.  WMT has also agreed to use only union labor to build dozens of planned new stores and to pay workers substantially above the minimum wage.

If successful–and I don’t see any reason why it shouldn’t be, WMT’s Chicago expansion will likely prove to be the thin edge of a wedge that opens up New York and Los Angeles to the company.

investment significance?

WMT (I own it) is no longer the dynamic growth stock it was for many years.  It’s just too big.  The Chicago developments are move evidence, though, for the view that the company can continue to grow profits and dividends at a 10%-15% annual rate for years to come.  They also suggest that WMT now realizes that retailing in Munich or London or Tokyo or Chicago or Los Angeles isn’t just like Bentonville but with a different climate–and may require significant cultural adjustment as well as superb operating skills.  That’s probably a bigger positive.