Companies Affected by Cut Backs in Consumer Spending

Eileen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

June data on consumer spending shows consumers cutting back on non-essential items and signals that slow economic growth continued for the second quarter of 2013. The Commerce Department reported that retail sales grew 0.4% last month. Excluding volatile sectors such as automobiles and gasoline, actual spending in June dropped 0.1%, according to The Wall Street Journal.

Downward revisions of spending in May suggested cautious spending by consumers, who are still adjusting to higher payroll taxes and reduced take-home pay.

While consumer spending has been the stimulus for U.S. growth this year, the rate of current spending is less robust than in previous economic recoveries. Some economists are downgrading their estimates for the second quarter to less than 1%. The slowdown in consumer spending seems to be affecting restaurants, department stores, and building material companies.

I’ll analyze three companies in these sectors to determine if cautious spending by consumers has affected their bottom line.

Darden’s challenges in 2013 may continue in 2014

During Darden Restaurants' (NYSE: DRI) last fiscal year, the company was focused on growing same-restaurant sales, which created positive results during the fourth quarter. Total sales during the quarter rose 11.3% to $2.3 billion from $2.07 billion generated in the fourth quarter of 2012. Blended same-restaurant sales grew 2.2% for the company’s top brands -- Olive Garden, Red Lobster, and LongHorn Steakhouse. The Specialty Restaurant Group grew 2.3% and the addition of new restaurants also contributed to higher sales.

Overall results for fiscal 2013 tell a different story with diluted EPS decreasing 12% to $3.14 from 2012’s EPS of $3.58. Net earnings for the year were $412.6 million compared to $475.5 million in 2012. Costs associated with the acquisition of 40 Yard House restaurants reduced EPS by $0.09 and net earnings by $12.3 million.

Clarence Otis, CEO of Darden, expects slow and uneven results for 2014 in the overall economy and in the restaurant industry. During the new fiscal year, the company plans to focus on providing its guests affordable options and sustaining same-restaurant traffic growth.

Macy’s customers spending less

Macy’s (NYSE: M) reported higher sales for the 13-weeks ended May 4, 2013, of $6.4 billion, up 4% from $6.1 billion reported in the same period last year. Cost of sales, however, also went up 4.1% to $3.9 billion from $3.7 billion in 2012. Comparable store sales for the first quarter increased 3.8% in 2013. Diluted EPS increased 28% to $0.55 compared to $0.43 in the same period in 2012, reflecting a rise in net income of 19.9% and a drop in outstanding common shares of 7%. The company also increased its quarterly dividend by $0.05 to $0.25 per share.

The period was challenging, according to CEO Terry J. Lundgren, with cooler than expected weather and weak sales from Macy’s more budget-conscious consumers and Bloomingdale’s higher income customers. The company is pursuing various growth strategies aimed at providing customers with “fashion, quality, value and convenience.” Full year estimates include 3.5% growth in comparable store sales and diluted EPS to range between $3.90 and $3.95.

Owens Corning sees pickup in roofing segment

Owens Corning (NYSE: OC) provides glass fiber insulation, roofing, and glass fiber reinforcements to the construction industry. Improvements in the housing market have increased the company’s margin in its roofing business, however the insulation segment is still struggling to return to profit levels last seen in 2007. Owens Corning’s glass fiber business provides a key material to the construction, transportation, industrial, and consumer sectors and its compound annual growth is estimated at 5%.

The company’s first-quarter 2013 results saw improvements in the roofing segment with net sales increasing 3.2% to $607 million and earnings before interest and taxes, or EBIT, rising 43.4% to $119 million. The insulation segment had losses before interest and taxes in the first quarter of 2013 but improved 61.7% from last year. Quarterly net sales remained flat with $330 million reported in 2013 and $331 million reported in 2012.

Low production and higher costs negatively impacted the glass fiber segment. Net sales for the quarter decreased 3.6% to $459 million and EBIT decreased 60.9% to $9 million. The company’s 2013 guidance shows expectations of margin improvement in each business segment, strongly influenced by the recovery in the housing market.

My Foolish conclusion

So far, Darden Restaurants and Macy’s are showing the effects of tepid consumer spending. Macy’s is optimistic and may be expecting increased spending in the third and fourth quarters with back to school and the holiday shopping season. Owens Corning is counting on the housing market, which has cooled somewhat due to rising interest rates, to boost its own recovery. Before buying shares, investors should watch for second-quarter results of these companies for signs of their businesses slowing down further.

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Eileen Rojas has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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