Retail sales have been in the spotlight over the past week. Last week, retailers reported June same store sales that were weaker than forecasted. The International Council of Shopping Centers (ICSC) calculated that retailers increased same store sales by 2.9%. This was the weakest month since July 2003. While overall same store sales were weak, higher end retailers generally did better than lower end. The table below shows a sampling of results for several retailers that focus in each market.
|June Same Store Sales||Estimates|
|Lower Priced Retailers|
|Higher Priced Retailers|
|Saks Fifth Ave.||+8.5%||+5.6%|
This week, the Commerce Department released its tally of June retail sales. The month-over-month change in retail sales fell 1.1% and dropped 0.2% excluding autos. Both were weaker than expected. However, on a year-over-year basis, retail sales increased 7.6% and excluding autos, sales jumped 9.4% excluding vehicle sales. This is quite a bit higher than the 2.9% increase reported by the ICSC. The two categories that exhibited the strongest growth in the retail sales report published by the Commerce Department were building materials and gasoline sales. Building materials increased 16.1% to $35.2 billion and gasoline stations growing 22.5% to $27.2 billion. Obviously, these two categories of retail sales are not heavily weighted in the ICSC calculation of same store sales. The areas of retail that were the slowest are in areas that have more publicly traded companies. General merchandise (+5.8% y-o-y) and restaurants (+6.8% y-o-y) grew sales at the slowest rate this year, while clothing stores (+6.1% y-o-y) rebounded from a weak May (up 4.5% y-o-y), which was the slowest sales month since November 2003.
Retailers same store sales have remained week this month. According to the ICSC, retail during the week ending July 10 were flat with the prior week, and month-to-date have increased 3.4% from a year ago. The month-to-date sales increase is the lowest since the first week of August 2003.
Earlier this summer, Wal-Mart said that higher gas prices were taking about $7 out of its customers pockets each week. Since then, several analysts and economists used the higher gas prices to explain the weak retail results in June. Considering how prolific the American consumer is, it seems illogical that an extra $7.00 a week would crimp the budget. Hey, that is what credit is for anyway. This week 7-Eleven reported that total June sales rose 5.6%. It also reported that merchandise same store sales rose 5.5% and the average price of gasoline sold at 7-Eleven jumped 31%. This seemed odd considering analysts and other retailers have cited that the increase in gas prices has caused retail results to be weak. Looking back since January 2002, it appears that the negative correlation that would be expected for merchandise sales and increases (decreases) in gas prices is non-existent. In fact, it appears positively correlated if anything.
Investor relations at 7-Eleven explained that part of the reason they have done better than what would be expected is due to several marketing initiatives that have been initiated to boost merchandise sales. It was also explained that their customers typically are higher on the economic ladder than some of the lower priced retailers and it's the lower wage earner that is getting pinched more. With that said, their plan called for year-to-date same store sales to up 4% to 6% midway through the year and was partially based gas prices declining. Merchandise same store sales are up 7% year-to-date, so the idea that higher gas prices are causing consumers to slow spending remains dubious. Additionally, Yum! Brands, owner and franchiser of Pizza Hut, KFC, and Taco Bell, commented during its conference call that it did not see any negative trends due to higher gas prices.
It is important to remember that retailers have been aggressively expanding for several years. This can cause a big difference between retail sales when viewed as a macro economic factor than when analyzing individual retailers. Total retail sales can remain strong, but an individual retailers share can get diluted by not only other retailers, but by their own increased store base. Plus, over the preceding year, retail sales have been boosted by fiscal policy along with housing inflation. The fiscal stimulus has ended and economists are expecting the growing labor market to offset the end of the fiscal stimulus.
Earnings season kicked off this week and so far 58 companies that comprise the S&P 500 have reported second quarter earnings. None of the companies have reported a decline in earnings and 70% have exceeded analysts' expectations, only two have missed. This does not include those that guided third quarter estimate down.
Gannett, publisher of the USA Today newspaper, reported that second quarter revenue and income rose 10% and 9% respectively. Advertising revenues were led by a 20% increase in employment advertising. Employment in manufacturing locals continued to lag, while those with concentrations in construction, service and tourism performed the best. Health, financial, and telecommunications categories were also strong. Department store advertising fell 8% during the quarter. Auto advertising also remained weak, down 4% during the second quarter and down over 6% in June. Costs have escalated for Gannett. Newsprint companies have been trying to raise prices to offset their own raising prices with only mediocre results. Gannett said that the price increase announced in the spring settled at a lower price than what the announced price was. Even with the lower price increase, Gannett's newsprint expense increased 11%, with price accounting for 9% of that. Gannett also commented that medical and benefit costs have increased.
The New York Times reported much weaker second quarter results and cut its fiscal year revenue forecast. Advertising revenue increased only 2.3%, with strength coming from help wanted, which increased 15%. The company reported that the weak ad sales during the second quarter have carried over into July with most of the weakness in entertainment, real estate and technology.
The biggest difficultly for investor right now is gauging how much of the expected earnings growth is built into current valuations. Judging from several of the earnings warning or misses lately, it seems that quite a bit is priced it. Just using Intel as an example, it is obvious to see investors are extrapolating past results throughout the rest of the year. For the second quarter, the semiconductor company increased sales by 18% and earnings per share by 77%. In terms of earnings per and revenue, this was the second best second quarter the company ever posted, the best being in 2000 when it earned $0.50 per share on $8.3 billion in revenues. Yet, investors fled causing the largest drop since October 2002 and a 52-week low after the company said that gross margin would be about 60% for the year compared to earlier guidance of 62%. This caused several analysts to drop full year earnings by about three cents to about $1.19. These lowered EPS estimates still represent 35% growth from last year. Conversely, Harley-Davidson reported a more meager 26% EPS growth, with 9% revenue growth. But Harley's results were 10% better than analysts' predictions and the company, but the company didn't raise production guidance for the third consecutive quarter. Investors bid up the motorcycle manufacture to a new all-time high. Do not misconstrue that I think either stock is attractively priced, I'm only pointing out that expectations are playing a significant role in the current market. With expectations currently set extremely high, there is significant room for equity investors to be disappointed. At the same time, the economy is has enough impetus for companies to post strong results.