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November 3, 2015

Retail Outlook Still Bumpy Compared To Historic Levels

by Jharonne Martis.

The retail sector tends to be a direct gauge of how consumers are feeling about themselves and their economic prospects. Although the Great Recession seems to be well in the past, if we take a longer look at the retail picture, we see there may not yet be much cause for optimism.

In the past 15 years, the U.S. underwent two recessions that shook the economy and consumer spending. Prior to the 2001 recession, consumer spending levels were at an all time high. Notice in the graph below, how the Thomson Reuters Same Store Sales Index (SSS Index) remained above the 3.0% healthy mark pre-recession. The SSS Index is the industry standard for tracking both the health of the retail sector as a whole, and the performance of the individual retailers that comprise the Thomson Reuters SSS Index.

During the first recession, in 2001, the index dipped below the 3% healthy mark and remained within the 0% – 3.0% range. Then, the SSS Index recuperated nicely afterwards and consumer spending remained within the 2% to 5% monthly growth during 2002 – 2007, for the most part. Subsequently, the index dropped to its lowest level ever during the Great Recession (Dec 2007 – June 2009). Since, then the index has fluctuated as consumer behavior has changed since the Great Recession. The index also started to dip into negative levels similar to the Great Recession.

Exhibit 1: Thomson Reuters Same Store Sales Index
Source: I/B/E/S data

Current state

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. Although consumer sentiment has gradually improved since 2010 (Exhibit 2, below), it’s leveled off, then declined, and has remained weak recently.

Global markets continue to be a big topic on all major news outlets — 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. They have also been saving for a rainy day. The U.S. Personal Saving Rate is stronger today than pre-recession years (2002 – 2007), when retail sales and the economy were booming. However, they are very worried about the ability to continue to do this in the future, including possible job loss.

Exhibit 2: Thomson Reuters/Ipsos U.S. Primary Consumer Sentiment Index (PCSI)
Source: Eikon

Not much joy ahead

What’s more, 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 issued negative guidance 22 times, vs. 56 as of today (10/19/2015). Similarly, with revenue, we’ve seen 30 negative pre-announcements (up from nine in August) for Q3 2015.

Exhibit 3: Change in Earnings and Revenue Guidance Q3 2015
Source: I/B/E/S data

Future outlook

Improvement in the job market, lower gasoline prices and a rise in personal income should bode well (in theory) for retailers going into the holiday season. There’s a sticking point, however — the deterioration of consumer confidence has kept shoppers from spending more freely.

Consumers are fed up with the lack of positive economic news. They are unsure where the economy really stands, and as a result retail sales have remained stagnant. For Q3 2015, our Thomson Reuters Quarterly SSS Index is expected to post 1.6% growth for Q3, slightly below last year’s 1.7% growth in Q3 2014.

Third quarter retail earnings are expected to grow 6.2% in Q3 and 8.7% in Q4 2015 – below last year’s Q4 9.3% gain. Similarly, Same Store Sales are expected to underperform last year’s in Q4 at 1.5% vs. 2.8%. Looks like the holiday season could be less merry than last year.

The news stories about unemployment and global markets will have to improve in order for people to feel good about opening their wallets. In addition, next year is an election year, and history has shown that in times of uncertainty, consumers do pull back on spending.

Exhibit 4: Thomson Reuters Same Store Sales Index
Note: 2Q – 4Q 2015 are estimates
Source: I/B/E/S data

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