Why Specialty Retail Can’t Speak for the Sector

by Alyssa Oursler | June 13, 2013 1:09 pm

Forget Father’s Day or el derecho. The star of this week is the retail sector.

Between a string of specialty retail reports and this morning’s release of the much-anticipated May retail data, it seems everyone is tuned into just how well consumer spending weathered any spring headwinds.

But so far, specialty retailers have posted a bit of a mixed bag.

Good news, though: You really don’t have to worry.

To start, May retail sales[7] were nice and sunny, tallying the largest improvement in three months, beating analyst expectations and leading to the usual cheering of low interest rates and the “wealth effect.”

Beyond that, earnings results from specialty retailers hardly provide a pulse of the broader economy or consumer spending habits.

For one, the stores have niche, narrow audiences, hence the term “specialty” retail. Lululemon and Prada target high-end shoppers — with many of the biggest spenders for the latter coming from overseas. That “cooling” headline mentioned for Prada, for example, partly was on the shoulders of Italian customers. Because of such prosperity and variety, they tend to be less affected by macro factors like the payroll tax cut that some suggest[8] Walmart (WMT[9]) suffered from.

Five Below, on the other hand, sells plastic bedazzled phone cases, discounted nail polish and tacky holiday accessories. The hordes of teens that flock to the store are also far from representative of the entire shopping population, and thus the broader economy. I guess their allowance might go up if Mom and Dad find themselves earning more and worth more thanks to a strengthening economy, but it’s hardly the same correlation[10] more traditional retailers like Target (TGT[11]) enjoy.

Then there’s Lululemon, which sold off in large part thanks to news from the corner office. Christine Day, CEO of the maker of yoga pants, announced that she will step down[12] once the company finds a successor. While such a blip could happen to any retailer, many speculate that another reason investors got so jittery is because Lululemon’s premium, at the time, was dependent on eye-popping growth.

Regardless of what moved the stock, Lululemon’s growth depends more on the current yoga fad than it does consumer spending.

Ulta relies much less on a fad. Still, its growth rates — which largely determine investor sentiment — don’t directly mean consumers are letting loose their purse strings. Instead, it might be that Ulta started its huge expansion a few years before the recession and has already doubled its count since 2008.

At some point, saturation will slow things down, not necessarily the macro environment. In fact, the company’s slipping same-store sales — which fell from over 10% to under 7% in the last quarter — might be proof we are already nearing that point.

You get the picture. Oftentimes, investors in specialty retail names are looking for break-neck growth … and that growth isn’t necessarily driven by consumer confidence or sentiment regarding the broader retail sector.

The bottom line: Don’t run screaming from the sector just because investors in these specialty stocks have the jitters.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. FRAN: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRAN
  2. FIVE: http://studio-5.financialcontent.com/investplace/quote?Symbol=FIVE
  3. PRDSY: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRDSY
  4. “cooling growth”: http://www.marketwatch.com/story/prada-sales-rise-14-but-cooling-continues-2013-06-11
  5. ULTA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ULTA
  6. LULU: http://studio-5.financialcontent.com/investplace/quote?Symbol=LULU
  7. May retail sales: http://www.reuters.com/article/2013/06/13/us-usa-economy-retail-idUSBRE95C0IF20130613
  8. some suggest: http://investorplace.com/2013/02/the-cold-hard-truth-behind-walmart-sales/
  9. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  10. hardly the same correlation: http://investorplace.com/2013/03/wmt-or-tgt-look-to-gdp-for-a-hint/
  11. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  12. announced that she will step down: http://investorplace.com/2013/06/lululemon-drops-6-stocks-in-60-seconds/

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