Measuring Economic Strength Through Retailers

By Arthur Pinkasovitch - January 6, 2012 | Tickers: NDN, DG, FDO, FDX, M | 0 Comments

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The performance of discount retailers if often viewed as a counter cyclical indicator of the overall economy. As the common mantra goes, when the public is faced with heavy levels of unemployment and financial hardships, more people resort to purchasing lower priced goods. While this theory is certainly is not complete, it was heavily pushed following the market collapse of 2008, which coincided with the strong performance of dollar stores such as Dollar General (NYSE: DG) and 99 Cent Only Stores (NYSE: NDN).

Upon releasing its quarterly results after the market closed on January 5th, Family Dollar Stores (NYSE: FDO) fell when trading resumed the next day and continued to drop a net 7.47% for the day. Initially, the poor performance of Family Dollar would suggest that the economy is booming and people are willing to pay premium prices for higher quality goods. However, this is not entirely the case. Family Dollar Stores revenue increased 7.6% to $2.15 billion (missing expectations) and net income reached a record high of $80.4 as 101 new stores opened in the quarter. Operating margins improved, comparable sales grew by 4.1% and management provided a favorable outlook of prospective business conditions.

In order to gauge the economy, and specifically the overall retail sector, investors should take note of next week’s retail sales report. The data gathered by the U.S Department of Commerce estimates the monthly sales of items ranging from retail and food, to electronics and furniture. With many retailers expecting large sales volumes during the holiday season, 66,700 retail staff were hired in November to cater to the expected Christmas foot traffic. Macy’s (NYSE: M) and FedEx (NYSE: FDX) were noted among the companies with the most significant push to increase staff. As a result of holiday staffing programs, the November unemployment rate fell to 8.6%.

Despite a slight fall in inflation adjusted wages and a drop in the personal savings rate, consumers have been taking on more credit and splurging in their shopping habits. A strong retail sales report, like Family Dollar Stores’ earnings, can mean different things to different people. Although consumer spending, which accounts for approximately 70% of GDP, is a vital component of a growing economy, overspending now implies underspending later, especially if shopping expenditures outpace real wages. Ideally, consumers with limited financial resources would focus their purchases to discount resources including dollar stores, while those with extra disposable income would spend on high priced luxury goods.

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