Between the sequester, higher payroll taxes and waning confidence in the economy, it was supposed to be merely a matter of time before consumers died … which in turn meant it was only a matter of time before the economy began to contract.
A funny thing happened on the road to disaster, though: Consumer spending didn’t die. In fact, according to Q1’s earnings results from all the major retailers, consumers are doing just fine.
Just for perspective, consumer confidence has been on the slide since November. That’s when the Conference Board’s consumer confidence score peaked at 71.5, and the Michigan Sentiment Index topped out at 82.7.
Although both measures have ebbed and flowed in the meantime, the bigger trend is pointed downward for each. The Michigan Sentiment Index ended up at only 76.4 for April. Although we’ve not yet heard the Conference Board’s final reading for April, its consumer confidence measure fell to 59.7 for March.
What gives? Actually, it should come as little surprise. Remember, Q4’s economic activity turned tepid right out of the gate, stemming from cuts in government spending on top of weakening export levels. The fourth quarter also was when we learned the market’s earnings had fallen by 5.1% in the third quarter, and we were forced to accept that Q4’s incomes would also fall.
And sure enough, they did. The S&P 500’s per-share earnings slipped 2.4% for the fourth quarter, even if we didn’t officially know it until Q1.
To compound matters, the new year kicked off with an automatic increase in Social Security taxes, from a rate of 4.2% back up to the pre-2011 rate of 6.2%. Although employees were only taking home 2% less than they had been, many economists felt that was a critical 2%, and taking it out of paychecks would ultimately significantly crimp consumerism.
Add in another round of government spending cuts (aka “sequestration”), and what would be surprising is if consumer confidence wasn’t deteriorating. Yet …
Already Back in Business
You don’t have to look too long or far to find confirmation that consumer spending — from low end to high end — is still respectable. Family Dollar (NYSE:FDO) boosted year-over-year sales by 17.7% in the first quarter, while upping the bottom line by 4.3%. At the other end of the spectrum, Coach (NYSE:COH) proved it’s still possible to draw a decent luxury-focused crowd. The maker of expensive purses upped its top line 7.1%, and increased earnings by 9% compared to its first quarter of 2012.
In fact, of the 18 S&P 500 retailers, restaurants and discretionary names that have posted first-quarter numbers, the average revenue improvement has been 9.2%, while income has been increased by an average of 29.6%.
Granted, a couple of the names in question were dealing with very low-ball comparisons. Take Netflix (NASDAQ:NFLX), for instance. It added a couple million new subscribers, and managed to swing from a loss of 8 cents per share to a profit of 5 cents. Hasbro (NASDAQ:HAS) more than doubled its year-over-year earnings in Q1 as well.
Even without those two statistical outliers, however, we’ve seen more than a little strength from consumer and retail stocks for Q1. It wasn’t the way things we’re supposed to be.
None of the major retailing or consumer names in question, however, have continued to turn things around as impressively as Harley-Davidson (NYSE:HOG) has.
With the price of an average “hog” ranging anywhere from $10,000 to $20,000 (and sometimes more) to carry little more than its rider, it would be tough to argue that Harley-Davidsons are anything other than self-gratifying purchases. Yet the company cranked up its first quarter profits by 34%, spurred by the shipment of 75,222 motorcycles last quarter. That’s 17% more than Harley shipped in the same quarter a year earlier.
And consumerism is dead? Not quite.
While the broad brush stroke is a bullish one again, there’s still a dark side to the picture: Not every retailer and restaurant is on a roll.
What’s interesting about that dark side is how the strength or weakness isn’t isolated to high-end spending or low-end spending. Starbucks (NASDAQ:SBUX) continues to grow by leaps and bounds by selling $4 cups of coffee, while Coach is only growing sales of high-end purses at lethargic rates. Auto parts wholesaler Genuine Parts Company (NYSE:GPC) hit a wall last quarter, yet all of the major auto parts retailers saw huge growth.
The point is, investors should be picking and choosing within the retail group. Make no mistake, though — there’s plenty of consumer spending to go around.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.