U.S. Consumer Economy: The Shift
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The gloomy June figures for the retail sector align with THE ECONOMIST’s contention the U.S. economy is shifting from a consumer to an export one.
As the U.S. Commerce Department reports, for June, retail sales fell 0.5%, representing the third consecutive month of decline, which hasn’t happened since the fall of 2008, when the financial crisis peaked. Meanwhile, the current issue of THE ECONOMIST, with its upbeat cover story of America as the “Comeback Kid,” notes that consumer spending recently has accounted for 65% of U.S. GDP. From 1982 until 2007, it had surged from 67% to 74% of GDP. Instead of shopping until they drop, that 99% of the population struggling financially is paying down debt. According to Federal Reserve statistics, household debt as a percentage of disposable income dropped from 133% around 2005 to about 115% currently.
This has already been bad news for the usually better insulated high end. Tiffany has lowered its forecast for earnings from 10% to 7% to 8%. In the middle, it could be the tipping point for distressed J.C. Penney, which recently lost the first round in its court battle with Macy’s to stock many of the Martha Stewart Living brands in its stores within a store. On the other hand, this could be good news for retailers known for their rock bottom pricing. Here are some positioned to thrive, if consumers continue to spend less.
Costco – Subscription Economy Player
No surprise, Costco (NASDAQ: COST), at $94.89, is near its 52 week high of $95.55 and light years from its low of $70.22. It’s a subscription economy player, which is a trend viewed in a positive light and includes companies ranging from LinkedIn to Zipcar. According to Costco’s Quarterly Report filed with the SEC, in the U.S. membership renewal is at 89.6%.
Its moat is that it’s more than a deep discounter since it also carries pricey merchandise such as the kinds of wines collectors are interested in. That means it can retain many customers in bad times and good. Another unique feature is that, unlike its nearest competitor Wal-Mart (NYSE: WMT), it never attempted to become an experience economy setting with ambiance. The North Haven, Connecticut store retains all the 'no charm' of the original big boxes, with the added negative feature of being huge. Recently Wal-Mart as well as other retailers has been cutting back square footage. Enter the store and there is no ambiguity that this is the old Costco which consumers have come to trust. And trust it they do. One of the shoppers I interviewed informed me “to watch each price” since some items, especially in fresh produce, could be more than at Wal-Mart and Aldi. However, she cherry picks her bargains and has renewed her membership for years.
Investors fearing that the stock might already have overheated might also trust that the company has lots of growth runway. Helix Investment Management is among those projecting high double digit profit growth for fiscal 2012 and mid range for fiscal 2013.
Dollar Tree – Dollar or Less Price Point
Dollar Tree (NASDAQ: DLTR) is well positioned, even in the crowded dollar store category. Motley Fool blogger Demitri Kalogeropoulous gives it a strong recommendation. It is at $52.32 in a 52-week range of $30.00 to $56.82. Unlike the Family Dollar (NYSE: FDO), for example, it has retained its price point of a dollar or less. Some of this may be accomplished with a bit of smoke and mirrors. Shrewdly it’s in the fast growing pet supply business. Its brisk seller Soft Paw cat litter resembles the traditional 10 pound bags but contains 7 pounds. Although I shop there four times a week for pet merchandise, never has anyone I interviewed about the kitty litter balked about the packaging difference.
The Family Dollar, on the other hand, may become a victim of bad timing. Recently it made the strategic decision to stock more upscale merchandise, including more national brands. Its typical customers, Family Dollar management informed PROFIT CONFIDENTIAL, “were living paycheck to paycheck.” That could give the edge to the Dollar Tree for consumers interested in one store shopping, especially since both carry refrigerated grocery items. However, Family Dollar is holding its own in its stock price at $68.35 in a 52-week range of $44.42 to $74.73.
Wal-Mart – Back to Discount Branding
The stock price of $72.99 in a 52-week range of $48.31 to $73.24 says it all. Investors are betting with their money that Wal-Mart has learned its lesson and won’t tamper with its discounter identity. After that disaster of an experiment playing with upscale merchandise it is back to its no-frills roots of low pricing, both in brick and mortar and online with consumer electronics. Experience economy player Target, with its designer fashions, could feel a backlash if consumers panic. Those produce shoppers I interviewed at both Wal-Mart and Target in Connecticut are well aware that Target prices tend to be higher. Most are also aware that Aldi’s prices for fresh produce, at least until recently, were significantly cheaper. Yes, Target’s cucumbers are laid out tastefully but so are items in traditional supermarkets like Stop & Shop which has become a distressed industry. The scandal about alleged bribery in Mexico isn’t much on the investor radar screen.
However, Wal-Mart will feel pressure on many fronts if the economy, as THE ECONOMIST observes, is stronger than most people think. Communities around the Washington D.C. area have rejected having new stores built there. This anti-Wal-Mart ethos could have the momentum it did in better economic times, especially if the liberal Democrats triumph in November.
No One Knows
In the investment business, as in a growing number of disciplines, brandnames are made by arguing aggressively that the end is near. THE ECONOMIST could be way off on its prediction of the ebbing of the consumer economy. So could all the numbers folks who are gleefully projecting a double dip worse than the traumatic first dip. What we know is that consumers are listening to the doom and gloom. That is writing the story in the retail sector.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. 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.If you have questions about this post or the Fool’s blog network, click here for information.