May Retail Sales Come in Weak: What Should Investors Do?

Source: Thinkstock

Source: Thinkstock

On Thursday morning we learned that May retail sales came in weaker than expected at +0.3 percent vs. an expectation of +0.6 percent, although April’s retail sales were revised up to +0.5 percent vs. the first report, which came in at +0.1 percent. This sent shares of retail stocks, as measured by the SPDR Retail ETF (NYSEARCA:XRT), as the fund continues to underperform the S&P 500 by about 9 percent for the year.

The numbers, while positive, may be worse than they actually look. There are a couple of reasons for this. The first is that these numbers aren’t corrected for inflation. While we haven’t yet gotten May’s CPI data April’s CPI rose by 0.3 percent, although keep in mind that this number is the “core” number, which doesn’t include food or energy. With rising oil and food prices this number probably understates the true inflation rate. Thus, at best, April’s real retail sales grew at 0.2 percent. May’s retail sales after we account for inflation, was probably flat.

But it gets worse when we look at retail sales ex-autos. In May retail sales ex-autos grew at just 0.1 percent. In April retail sales ex-autos actually fell by 0.1 percent, and this number was revised downward despite the fact that April’s retail sale with autos was revised upward, meaning that retail sales accounted for all of the increase in retail sales and then some in April.

Why do we want to look at the data without auto sales? Most people borrow money to buy a car, and while people borrow money to buy all sorts of consumer goods they are far more likely to do so when buying a car. This means that auto sales don’t immediately translate into money leaving consumers’ pockets, which is what we are primarily interested in when we look at retail sales.

Thus accounting for inflation and excluding auto sales retail sales declined in April, and they most likely declined in May presuming that inflation was greater than 0.1 percent. This in itself is bad news, and it should come as no surprise to those investors who have been observing the onslaught of negative economic news hitting the market this year, including:

  • Negative Q1 GDP in the U. S.
  • Declining Chinese exports.
  • Rising energy and food prices.
  • A reduction in stimulus from the Federal Reserve.
  • A reduced global growth estimate in global growth coming out from the World Bank.

These points add up to tell a pretty bleak story that is only partially offset by some positive news such as a lower unemployment rate and net job creation, although these are largely the result of people leaving the work force and lower paying jobs, respectively.

So as investors, we need to be very cautious, especially in retail stocks.

While there is no reason to commit any money to the retail space there are opportunities. Look for companies that cater to consumers who are looking for bargains, and that generate consistent earnings streams. Dollar stores are a great example of the opportunities out there. While we have seen some pretty lousy numbers come out of a number of retailers such as Dick’s Sporting Goods (NYSE:DKS), Staples (NASDAQ:SPLS), and Lululemon Athletica (LULU) companies such as Dollar Tree (NASDAQ:DLTR) have been performing extremely well. If you want to gamble a little in the discount retailer space you can consider a position in Family Dollar (FDO), which has attracted attention from billionaire activist investor Carl Icahn, although be aware that this stock has risen considerably in the past several days.

Investors can also flock to the safety of Wal-Mart (NYSE:WMT), which has shown signs of weakness, but which has also weathered the retail storm very well. Its strong capital position and its unparalleled infrastructure network make it a likely winner in the long run. It trades at a modest 15.7 times earnings and pays investors a 2.5 percent dividend which the company increases every year.

Disclosure: Ben Kramer-Miller has no position in any of the stocks mentioned in this article.

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