Retail Sales – Part ll – Tis The Season To Be Jolly ??

By Randy D. Lewis, CFA, MBA
Senior Analyst, EquityNet Research
December 15, 2009

The rollercoaster world of retail sales continues its ascent with November figures again coming in better than expected after October’s surprise, and sending the U.S stock market and U.S. dollar higher. November is important because it includes the famous (or infamous) Black Friday, the day after Thanksgiving, considered to be the first major shopping day of the holiday season.

The Commerce Department said total retail sales increased 1.3% in November, the largest spread since August. It was the second straight monthly gain and again beat market expectations. Compared to November of last year, overall retail sales were up 1.9%, the first year-over-year increase since August 2008, according to one Commerce official.

Just as important, a separate report showed consumer sentiment improved in early December on signs of stabilization in the employment market. The data were the latest indicating the economy may expand at a healthier pace in the fourth quarter than the 2.8% annual rate in the pervious period.

It should be noted that total retail sales includes gasoline and autos, two facets that are not necessarily tied to the holiday shopping season. This brings up a point that readers must be careful which data they are looking at. There are many statistics, from many different sources, so one needs to be aware of what he or she is truly trying to gauge.

If it is consumer sentiment (also called “consumer confidence”) then total figures are fine. From an analytical standpoint – at least this analyst’s opinion – automotive sales are a strong sign of consumer confidence. Gasoline, on the other hand, may or may not be. Oil is a commodity and demand will always increase when prices drop as they have. But “sales” equals price times quantity (P x Q), so if price falls and quantity is unchanged, then obviously sales figures go down. But if there is enough of a quantity increase, then sales can remain unchanged or even go up – which is what we saw with gas stations.

But if it’s one thing Wall Street loves, it’s positive surprises. And the data certainly cannot be viewed as anything but positive. The big debate about whether consumers will be watching their budgets this holiday season, at least to the point where sales are actually hurt, seems to be subsiding quickly. Excluding the 1.6% increase in auto sales, U.S. retail sales rose 1.2% in November, still the fastest since January, according to Commerce Department data.

Now the caveat. If it’s really holiday sales we are after, then we are interested in true holiday shopping (purchases made solely because it is this time of year and would not have been made if it were not) and have to go to the source. And that source is same-store sales of retailers that cater to holiday shoppers. These are the stores that you and I visit at the malls and shopping centers around the country this time of year to buy gifts and spend our gift money received from others. Common sense.

So what is same-store sales? For a given period (usually a month), it is a comparison of sales from stores that have been open for at least a year, with the same period a year earlier. Why is it so important? If you think about it, there are only two ways a retailer can increase sales – 1) sell more at stores they already have; or 2) open new stores. Since opening new stores is unsustainable (look at Starbucks), it is very important to analysts that retailers sell more at existing stores.

And unfortunately, this data for November was disappointing. Overall, sales fell 0.3%, reversing the gains seen in September and October, according to the International Council of Shopping Centers. The trade group had cut its November forecast twice to a sales increase of 3% to 4%.

But I always like to end on a good note, and there are two. First, consumer sentiment is highly psychological. Besides the raw data that looks good for early December, it puts in consumers minds a sense of hope and better outlook for the future. Second, and going along the same lines, many analysts feel that people have delayed their holiday shopping more this year than in previous years. I would tend to agree with that.

All in all, we again will have to wait and see how all this pans out…

Randy Lewis, CFA, MBA is founder and senior analyst at EquityNet Research, a boutique investment, industry and economic research firm. He is also founder of The GSL Group, LLC, a company focusing on private business valuation and advisory. www.thegslgroupllc.com.