Retail sales in August increased by 0.2% overall and 0.1% excluding the auto sector, reported the Commerce Department. For the video report, click here. August followed a decline in July, as seen in the chart below. Consumers are still shaken up by the volatility in the stock and global markets. Lower gasoline prices compared to a year-ago are also hurting revenue. This year, retailers were also faced with fewer sales days in August and a later back-to-school season pushed by a shift in the Labor Day weekend, which now entirely moved into the September retail cycle.
Exhibit 1: U.S. Retail Sales
Source: Eikon
Consumer Sentiment
Despite an improvement in the employment market, other economic data has been mixed. What’s more, the recent wild ride in the stock market and volatility caused by non-transparent economic policies in China have caused the U.S. consumer to worry. Global markets continue to be a big topic on all major news outlets and is instilling fear in consumers. They see risk — especially when the economy seems to be recovering at a glacial pace — and as a result are spending cautiously.
Exhibit 2: Thomson Reuters/Ipsos U.S. Primary Consumer Sentiment Index (PCSI)
Source: Eikon
Shoppers are Buying Cars
Fueled by lower gas prices and lower interest rates, consumers continued to trade for bigger cars, including sport-utility vehicles and pickup trucks. Rising auto sales set a new 10-year record in August, (to 17.81 million annualized from 17.55 million) and should have made a decent contribution to the overall retail numbers. Consumer credit is strong as well but lower gas prices weighed on the overall retail sales number.
Exhibit 3: U.S. Retail Sales
Source: Eikon
Income levels holding steady
Unemployment has dipped to its lowest level (5.1%) since the recession, which is within the range the Fed considers full employment. With the improvement in the job market, personal income has seen steady growth at 0.4% and gasoline prices have been falling. Consumers have taken advantage of lower interest rates and bought homes and cars. In turn, strong home sales have led to robust home improvement and furnishing purchases. These trends are expected to continue over the next few quarters. Consumer credit use has improved significantly, driven by auto loans.
Exhibit 4: The U.S. Unemployment Rate
Source: Eikon
Current Quarter Outlook
During this back-to-school season, parents stuck to basic necessities, leading some to question retailers’ faith in this holiday season. The third quarter is off to a slow start and retailers are warning us not to expect much from them for the current quarter.
In the beginning of the quarter (8/11/2015), retailers had issued negative guidance 22 times, vs. 52 as of today (9/14/2015). Similarly, with revenue, we’ve seen 27 negative preannouncements (up from 9 a month ago) for Q3 2015.
Exhibit 5: Change in Earnings and Revenue Guidance Q3 2015
Source: I/B/E/S.
Heading into the holiday
The improvement in the job market, lower gasoline prices and rise in personal income should bode well in theory for retailers going into the holiday season. However, the deterioration of consumer confidence has kept shoppers from spending more freely.
The S&P500 Consumer Discretionary sector index is expected to see a growth of 10.0% in Q3, followed by a 13.5% gain in Q4 2015 – below last year’s 14.6% gain. Similarly, Same Store Sales are expected to underperform last year’s in Q4 at 1.7% vs. 2.8%.
Exhibit 6: Thomson Reuters Same Store Sales Index
Source: I/B/E/S.
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