Better-than-expected holiday-period sales and improving confidence among U.S. consumers appear to be indicative that the worst part of the recession may be over. This observation is borne out by the evidence that consumers have loosened their purse strings amid the high unemployment situation and tight credit conditions.
According to the Commerce Department figures, retail purchases increased 0.5% last month, reflecting the third gain in the past four months. The increase was also above the initial expectation of growth of 0.3%. In addition, consumer spending grew at an average 2.4% pace in the last six months of the year.
Retail sales are an important indicator of consumer spending, which accounts for approximately 70% of the U.S. GDP. The U.S. economy came out of the Great Recession in the third quarter of 2009 with the growth rate accelerating in the last quarter of the year. This was fueled by gains in manufacturing and business investment, which in turn reflect growing demand from overseas and efforts to rebuild inventories.
The National Retail Federation expects that while the retail environment will remain difficult, the improving economy might bring in some relief in terms of positive sales gains. Retail store chains were able to witness strong sales trends by cutting down inventories and offering attractive discounts to customers.
Retailers like Macy’s Inc. (M) and Gap Inc. (GPS) may report strong profits by maintaining lean inventories. However, the question is: Can retailers can keep the momentum going forward? This is because consumers are still under pressure and unemployment is at a 26-year high of near 10%.
OPPORTUNITIES
Most of the apparel retail chains have benefited from the favorable holiday season. In this group, we like companies like Gap (GPS) that reported strong fourth quarter fiscal 2009 results despite the challenging market conditions. The company also reported 18% increase in earnings year-over-year, driven by solid sales at its low-price Old Navy segment. It has benefited from the increasing preference among U.S. shoppers for lower-price stores due to the challenging macroeconomic environment.
The other company of interest is Limited Brands Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products, that posted better-than-expected fourth quarter results. The company’s sustained focus on cost containment, inventory management and merchandise initiatives has kept it afloat in a difficult consumer environment.
Macy’s Inc. (M) also posted strong fourth quarter earnings buoyed by effective inventory management, division consolidation and the customer-centric localization initiative called ‘My Macy’s’ aimed at improving sales and reducing operating expenses.
Sears Holdings (SHLD) reported impressive performance driven by growth in Kmart. However, the Domestic division continued to struggle due to the ongoing downturn in the housing industry, which has affected sales of home appliances, lawn and garden, and home electronics.
WEAKNESSES
There are certain companies that are still facing the brunt of the recession and reporting losses.
Abercrombie & Fitch Co. (ANF), a leading specialty retailer, reported relatively weak fourth quarter 2009 results. The year-over-year decline in results was primarily due to the prolonged economic downturn that resulted in reduced consumer discretionary income and cuts in non-essential spending.
Home Depot (HD) also witnessed stress from declining market fundamentals during the quarter with a challenging macroeconomic environment and weakness in the U.S. housing sector. Total sales for the quarter were almost flat year-over-year, declining marginally by 0.3% to $14.6 billion.
J.C. Penney Company Inc. (JCP) also reported dismal fourth quarter. Total sales dipped by 3.6% to $5.6 billion from $5.8 billion in the prior-year quarter, primarily due to a 4.5% reduction in same-store sales. J.C. Penney recorded the most sluggish performance in the home division, and in terms of geography, the Northwest region, while the best results came in at women’s apparel and shoes and in the Central region of the U.S.
