Retail Recovery? - Analyst Blog

Retail sales rose a stronger-than-expected 2.7% in August. The consensus expectation was for a rise of 1.9%.

Most of the gain was due to the Cash for Clunkers program, which led to a 10.6% rise in sales at auto dealers. However, even stripping out autos it was a stronger-than-expected report, up 1.1% versus expectations of a 0.4% rise.

On a year-over-year basis, total retail sales are down 5.3% and, excluding autos, they are down 6.2%. Autos are down 1.0% on a year-over-year basis. Keep in mind that a year ago retail sales started to fall off a cliff following the financial meltdown. Therefore, going forward the comparisons are going to start to look very easy.

As the graph below (from http://www.calculatedriskblog.com/) shows, it looks like the retail worm has turned. It tracks the year-over-year change in retail sales in both real and nominal terms, excluding auto sales. While the chart only goes back to 1993, it does illustrate just how deep a recession we were in. Historically it has been rare to see a nominal retail sales decline, let alone a year-over-year decline of more than 10%.

The improvement in sales for the month was widespread. Electronic and Appliance sales rose 1.1% (but are down 13.6% year over year). We got some confirmation of this today when Best Buy (BBY) announced that its sales beat expectations, although poor gross margins caused a miss on earnings.

Clothing stores posted a 2.4% increase (-5.1 year over year). Gas stations posted a 5.1% increase (-26.7% year over year). With gas stations, that is mostly about the price of gasoline, not the volumes sold. Sporting Goods and Hobby stores saw a 2.3% gain (-0.4% year over year) and Department Stores had a monthly gain of 2.4% (-4.7% year over year). There were only two real weak spots on the month: Building Material stores (think Home Depot (HD) and Lowe’s (LOW)) fell 1.2% on the month (-13.6% year over year), and sales at furniture stores were down 1.6% on the month (-12.8% year over year).

All in all this shows that the back to school season was more successful than most people had anticipated. Consumers are starting to come out from their shell. However, in the absence of wage growth and with high and rising unemployment, I wonder how sustainable the gains really are.

Shrinking levels of consumer credit are not likely to help matters either, especially for big ticket items. That may be part of the reason that furniture stores lagged behind other areas of retail. On a year-over-year basis, we should start to see gains in the next few months, but that will say much more about the fall of 2008 than about the fall of 2009.

The month to month numbers should be much more interesting. It is a pretty fair bet that there will be some significant give back in the September numbers on the auto front. How much the Cash for Clunkers program pulled forward demand is an open question.

Still this is a very encouraging report, and I suspect the market should like it. More evidence that the recession is now behind us.