Retail Therapy

What do Wal-Mart, Family Dollar Stores, Lumber Liquidators and the Container Store have in common? CEO’s from all of these retailers lamented the tepid pace of consumer spending. One even labeled the condition a “retail funk” that has infected the US economy. Let’s start with the biggie: Wal-Mart President and CEO Bill Simon told both Reuters and CNBC that shoppers have not returned to world’s largest retailer at the pace one might expect five years after the recession ended, because “middle-class and lower-class are still economically challenged, only spending during holidays and for family occasions." Despite gains in employment, Simon predicted it would take six months to a year for retailers to start seeing a sales boost from job growth. “We’ve reached a point where it’s not getting any better but it’s not getting any worse – at least for the middle (class) and down." The numbers bear out those sentiments: sales at Wal-Mart's U.S. stores have fallen for five straight quarters, and traffic has dwindled for a year and a half.

Family Dollar Stores reported disappointing quarterly earnings last week and CEO Howard Levine said, "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment." Similarly, Lumber Liquidators’ CEO Robert Lynch said that earnings were weaker in the first quarter due to bad weather, but the much-hoped for spring-awakening did not occur and “Customer traffic to our stores was significantly weaker than we expected.”

But it was The Container Store’s CEO Kip Tindell (check out this 2011 CBS Sunday Morning segment about The Container Store and CEO Tindell), who actually diagnosed the problem: “Consistent with so many of our fellow retailers, we are experiencing a retail 'funk'…we continue to experience slight traffic declines in this surprisingly tepid retail environment. While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014 – so we’re not alone in this."

Investors will be eager to see whether other retailers have felt the pinch. The June Retail Sales report will be released on Tuesday and many economists are keeping a keen eye on the results. Sales have been inching up, but there has yet to be a broad-based, consistent gain among a variety of retailers. Despite the woes at the companies noted above, carmakers have enjoyed big gains and high-end retailers, like Tiffany’s and Burberry Group have been racking up the sales.

One thing is clear: until more Americans feel confident enough in the economy to spend more money, we are likely to see mixed results and sub-par growth. We’ll hear a little more about the nation’s progress this week, when Fed Chair Janet Yellen testifies before the Senate Banking and House Financial Service Committees. After minutes from the central bank’s recent policy meeting revealed that the Fed is planning to wrap up its bond buying program in October, lawmakers are likely to ask when the Fed will begin to raise short term interest rates. Based on the economic projections submitted at the most recent policy meeting, officials expect the first rate hike will occur around the middle of next year.

MARKETS:

• DJIA: 16,943, down 0.7% on week, up 2.2% YTD
• S&P 500: 1967, down 0.9% on week, up 6.5% YTD
• NASDAQ: 4,415, down 1.6% on week, up 5.7% YTD
• 10-Year Treasury yield: 2.52% (from 2.64% a week ago)
• August Crude Oil: $100.83, down 3.1% on week (4^th consecutive weekly loss)
• August Gold: $1337.40, up 1.3% on week (4^th consecutive weekly gain)
• AAA Nat'l average price for gallon of regular Gas: $3.62 (from $3.55 a year ago)

THE WEEK AHEAD: The financial services sector will headline earnings reports in the week ahead. Analysts predict it will be a tough quarter, with revenue declining by 5.6 percent from a year ago and profits down by 10.3 percent. Investors will pay special attention to Citigroup’s report, after it was reported that the bank and the Justice Department were nearing a $7 billion dollar deal to settle a civil investigation into the sale of mortgage investments.

Mon 7/14:

Citigroup, Barclay’s

Tues 7/15:

Goldman Sachs, JP Morgan, Johnson & Johnson, Yahoo, Intel

8:30 Retail Sales

8:30 Empire State Manufacturing Index

8:30 Import/Export Prices

10:00 Business Inventories

10:00 Janet Yellen testifies before Senate Banking Committee

Weds 7/16:

Bank of America, eBay, Yum! Brands

8:30 Producer Price Index

9:15 Industrial Production

10:00 Housing Market Index

10:00 Janet Yellen testifies before House Financial Services Committee

2:00 Fed Beige Book

Thurs 7/17:

Morgan Stanley, Google, Schlumberger

8:30 Weekly Jobless Claims

8:30 Housing Starts

10:00 Philadelphia Fed Survey

GE CEO Mary Barra and general counsel Mike Millikin testify before a Senate subcommittee on why it took so long to recall cars with faulty ignition switches.

Fri 7/18:

General Electric

9:55 Consumer Sentiment

Retail Therapy

Consumer spending grew steadily during the first three-months of the year, but the increase was mostly due to higher heating bills and medical expenses. Things improved towards the end of the quarter, with a brisk increase in March retail sales, but many economists attributed the surge to pent-up demand after the winter’s chill and a big uptick in auto sales. This week, we will learn whether Americans were willing to spend money in the stores during a mostly normal month. Analysts are hopeful that April Retail Sales will show moderate progress, on the heels of improving sentiment. In advance of the report, there were a number of retail milestones last week that beg the age-old question: With sales sinking and stores closing, can brick and mortar retailers adapt their business models to survive? Last week, Office Depot and Sears announced that they would close stores; and in addition to the massive security data breach, Target’s CEO Greg Steinhafel lost his job in part because foot traffic was down and the company continues to lose business to online competition.

Although sales in physical stores still account for over 90 percent of overall retail sales activity, research shows that growth of online sales will skyrocket in the future. Just consider that a third of consumers Forrester surveyed early last year said they use their smartphones to research and compare prices in-store, and many expect to use their phone for price research even more in the future. Or how about this neat factoid from the New Yorker’s Amy Merrick: “Five years ago, Macy’s revenue was around $23 billion, while Amazon’s revenue was about $24 billion. Last year, Macy’s had nearly $28 billion dollars in revenue; Amazon had more than $74 billion.”

All may not be lost! Some brick and mortar companies have made big investments online and it appears to be paying off. For the first time in 10 years, Wal-Mart’s online sales growth surpassed Amazon’s last year (30 percent vs. 20 percent). Of course Amazon still holds a huge advantage: Amazon's online sales of $67.8 billion dwarfs Wal-Mart's $10 billion and last year, Amazon sold more than its next 10 biggest competitors combined. That said, Wal-Mart and other forward thinking retailers have jumped into the fray, which should eventually put pressure on the e-commerce giants. Wal-Mart, along with Macy's, Nordstrom and Kohl's will report earnings this week.

One more retail milestone: Chinese-based Internet marketplace Alibaba, which has been described as e-Bay, Amazon and PayPal combined, announced its US initial public offering, which could be the largest Internet IPO since Facebook. Alibaba has grown into the largest e-commerce company in the world’s most populous country, with a reported transaction volume that’s triple the size of eBay, and more than double the size of Amazon.com.

MARKETS:

• DJIA: 16,583, up 0.4% on week, up 0.04% YTD
• S&P 500: 1878, down 0.1% on week, up 1.6% YTD
• NASDAQ: 4,071, down 1.3% on week, down 2.5% YTD
• 10-Year Treasury yield: 2.59% (from 2.59% a week ago)
• June Crude Oil: $99.99, up 0.2% on week
• June Gold: $1302.90, down 1.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.66 (from $3.56 a year ago)

THE WEEK AHEAD:

Mon 5/12:

2:00 Federal Budget

Tues 5/13:

7: 30 NFIB Small Business Optimism Index

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

11:00 Q1 2014 Quarterly Report on Household Debt and Credit

Weds 5/14:

Macy's, Deere, Cisco Systems

8:30 Producer Price Index

Thurs 5/15:

Nordstrom, Kohl's, Wal-Mart Stores

8:30 Weekly Jobless Claims

8:30 Consumer Price Index

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 NAHB Housing Market Index

10:00 Philadelphia Fed Survey

Janet Yellen Speech: “Small Businesses and the Economy”, National Small Biz Week 2014

Fri 5/16:

8:30 Housing Starts

9:55 University of Michigan consumer-sentiment index

10:00 April Regional and State Employment and Unemployment