Investors care about retail spending because most of U.S. gross domestic product is derived through consumption. Consumer spending is a measure of economic health and corporate profits. A decline in the growth rate of consumer spending (or even a contraction) is a precursor to recessions. For those reasons, the declines in some big retail stocks has put traders on edge this quarter.
With all the bad news about retail stocks this earnings season, is consumer spending as bad as it sounds?
The short answer to that question is “no.” Retail spending and consumer activity look good, but understanding why that seems to be contradicting so many headlines is important.
The obvious red flags this quarter have been the price-performance among traditional retail stocks. As you can see in the next chart, stock prices (and margins) have been in decline among many of the major names.
It is easy to assume that if retail stocks and earnings are falling, then consumers must not be spending. If that were true, we would be very concerned. Fortunately, retail spending is on the rise, but traders often confuse spending with profits when spending is actually equal to sales (or revenue).
For example, in the next chart you can see the price performance of Nordstrom, Inc. (NYSE:JWN) compared to its revenue trend (positive) and its earnings trend (negative). What this shows is how traders can be fooled into assuming that sales are falling when they are actually rising because they over-focus on earnings.