On the surface, April's retail sales figures look solid. If you dig deeper though, you'll see a red flag that names like The Home Depot, Inc. (NYSE:HD) and Saks Inc. (NYSE:SKS) are already all too aware of.... merchandise stress (retailers that don't sell cars or food) are hitting a wall. While both HD as well as SKS topped earnings estimates in the prior quarter, sales fell for each - the bigger no-no of the two metrics.
The U.S. Department of Commerce reported that April-2012's retail sales were higher by 0.1% compared to March of 2012, thiough the $408 billion U.S. consumers spent last month was 6.4% more than they spent in April of last year. The Home Depot and Saks Inc. didn't garner their fair share of the improvement. Even though HD earned the expected operating profit of $0.65 and increases sales by 5.9% to $17.81 billion, the top line fell short of the expected $17.96 billion. SKS is telling the same story for the prior quarter. Operating profits were up from $0.16 per share to $0.19, topping estimates of $0.18. Total sales were up 3.8%, reaching $753.6 million. Problem is, the pros were expecting $764.4 million.
And their shortcomings underscore one of the key (even if understated) worries regarding retail consumption right now - merchandise stores aren't thriving; food and autos are carrying the majority of the weight.
Last month, general merchandise stores' sales fell 0.1% compared to March of 2012's total. Though March's month-to-month (Febr-2012 to Mar-2012) comparison was a decent 0.6% increase, that number was strong only because it was compared to February's weak number... a 0.2% dip from January-2012's sales levels. It's a problem, because the general merchandise segment of the monthly retail sales figure is the biggest piece of the pie; it makes up about 70% of consumer spending.
To be fair, it's not like every single retailer is in dire straits. Even Saks Inc. and The Home Depot grew earnings as well as revenue. That was for a full quarter though, and both still missed forecasts. Given that this is an expectations-based market AND that the slow-down seems to have materialized at the tail-end of their recently reported quarters [meaning their last quarter's results don't reflect what's unfurling right now].
But is it really a problem for the economy? In other words, are these red flags truly something that should give SKS, HD, or any other retail investors pause?
Not yet, but it is something to keep on the radar. While inflation-adjusted retail sales aren't quite back up to 2007's peak levels, on an absolute basis we just came off the best retail sales month ever (March), and the overall uptrend is still intact. Last month's contraction is fairly clear on the chart below, but it's not a contraction we haven't seen and quelled before.
Bottom line: Though it's too soon to say the surge in retail spending is over, it is pretty clear that the era of easily topped forecasts is winding down. From here, and for indefinitely, the slower-rising retail tide isn't going to lift all boats equally.