Cheaper gas prices — once a major reason to bet on consumer spending, has lost all its relevance, has lost all of its relevance. There’s no point in arguing that it’s still some sort of catalyst. The data doesn’t show it.
Plummeting oil prices serve as a “tax credit,” the argument goes. The more money people save at the pump, more money would be left to spend in other discretionary areas like retail.
Of course, I bought into it. It made too much sense to not connect the dots.
But if that were the case, Macy’s, Inc. (NYSE:M), which missed first-quarter earnings and revenue estimates Wednesday, saw little of that spending. And I don’t imagine, beyond smart financial engineering, that investors should expect better results from retailers like The Home Depot Inc (NYSE:HD) and Kohl’s Corporation (NYSE:KSS) that have yet to report.
Why? U.S. retail sales didn’t budge in April, according to Wednesday’s report. They flatlined, against estimates of 0.2% growth. And the month-over-month number appears even worse, given that March data was revised upward to a show 1.1% gain versus the prior reported 0.9% increase.
While a lot of the April data factored in big-ticket items like automobiles, the number remained unchanged when adjusting out things like building material, cars and food services. So, no, Macy’s didn’t excite Wall Street Wednesday with $6.23 billion in first-quarter revenue (down 0.7%). But beyond giving away its merchandise, there seemed to be little the company could do — consumers just weren’t consuming.
Macy’s Won’t Be the Only Retailer Hurting
So where did the “gas tax credit” go? The most likely locations are savings accounts and paying down debt. And that’s not what CEOs want to hear, especially after a downbeat first quarter, owed mostly to the strong U.S. dollar. This means businesses, especially multinational companies, are being dinged on both ends.
With the likes of Nordstrom Inc. (NYSE:JWN) and HHGregg, Inc.(NYSE:HGG) due to report earnings results Thursday and Friday, respectively, investors would do well to lower their expectations. For now, Macy’s must find a way to get revenue back on the right track after missing Wall Street sales estimates for four consecutive quarters.
For the quarter that ended March, the Cincinnati, Ohio-based retailer, reported a profit of $193 million, or 56 cents per share, missing estimates of 62 cents. Macy’s, whose shares are down more than 3% on the year, posted first-quarter revenue of $6.23 billion, also shy of analyst’s target by some $90 million.
As noted, Macy’s hasn’t had a great history of meeting Wall Street’s revenue projections. So, while April’s retail sales were disappointing, it’s only one aspect to this story, not the sole cause for the miss. To that end, the weak retail number does help the likes of top-performers like Home Depot and Lowe’s Companies Inc. (NYSE:LOW), which have no problem moving their products each quarter.
And while shares of HD stock and LOW stock, which both trade at price-to-earnings ratios well above 20, are not as cheap as Macy’s P/E ratio of 15, they still look like better buying opportunities, given that expectations have now been lowered on account of Wednesday’s data. Not to mention, playing the “U.S. dollar/currency headwinds” card should mitigate any downfall.
Bottom Line
All told, consumer confidence in 2015 is not yet at a level suggesting the U.S. economy can withstand an immediate hike in interest rates, which is what the market fears. In fact, the probable delay of a rate hike is about the only positive aspect to April’s retail numbers.
I would stay away from Macy’s stock until management can get revenue climbing in the right direction. At the same time, I would play both HD stock and LOW stock, which — regardless of what their numbers say — will see their shares rise. And they don’t need cheap gas for that to happen.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
