In the past few weeks, I've examined the retail sector from a few different vantage points. We've considered the growing divergence of positive performance of the stocks of companies catering to male-oriented vs. female-oriented consumption and the reversal of the trend toward high-end vs. low-end grocery store stocks over the past few years.
In this column we'll consider the relative performance of high end, mid-tier, and discount retail outlets over the past few years.
The first observation is that although the female-oriented retail outlets are underperforming the stocks of companies that cater predominantly to male consumption, they are outperforming the stocks of broad-based mid-tier retail outlets.
The second and more important observation is that high-end retail is outperforming the mid-tier. This is important because it is the exact opposite of what has been happening in the grocery stores, where the performance of the mid-tier has been noticeably outpacing the high-end stores and discounters.
This is a bit of a conundrum, as it is not in keeping with the rhythm that would be expected to be shown by consumption patterns and stock performance if there were a broad consensus of a positive economic trajectory by both groups.
Positive economic performance should be first exhibited by an increase in income and consumption patterns by wealthier people, and this should be exhibited in positive performance by the stocks of companies that cater to them.
Consumption by wealthy people drives income and thus consumption by the next tier of consumers below them. This should be exhibited, typically with a lag, in the general performance of companies that cater to them.
For our discussion here, I'll consider the performance of two stocks in each retail group: high end, mid-tier and discounters. In the high-end group we'll look at Nordstrom (JWN), and Macy's (M), in the mid-tier, Wal-Mart and Target (TGT), and among the discounters, Dollar General (DG) and Dollar Tree (DLTR).
Some observations first:
First, all are large national or near-national chains with positive earnings and price-to-earnings ratios roughly between 15x and 19x, and they are indicative of country-wide consumption patterns and investor participation.
Second, although the market capitalizations of the high-end retailers and discounters are similar, in the range of $10 billion to $20 billion, the mid-tiers are by far larger: Wal-Mart is at about $240 billion, and Target is at about $40 billion.
Third, there is a dramatic difference in their dividends. Nordstrom and Macy's are at 1.9% and 1.8% respectively, while Wal-Mart and Target are 2.5% and 2.9%, and Dollar General and Dollar Tree pay no dividend.
Comparing dividend-paying stocks with non-dividend-payers should only be done as part of an analysis, as the two groups attract capital that has different goals. It's still a good comparison to make, however, especially as a means of determining consumer and investor sentiment.
Since the last recession ended about five years ago, there's been a dramatic difference in the performance of all of the stocks. The high-end retailers and discounters are greatly outperforming the mid-tier.
Nordstrom and Macy's have appreciated by about 370% and 520% respectively, while Dollar General and Dollar Tree are up 150% and 275%. Conversely, Wal-Mart and Target are up only 60% and 90%.
The first takeaway is that the high-end retailers are way outperforming, but there's been little extension of this to the mid-tier, and the discounters are attracting consumers away from the mid-tiers.
This is in keeping with both the growing concentration of wealth and income and the lack of the creation of the virtuous cycle of consumption that starts with high end and then extends progressively to the broader consumer base.
If consumers and investors believed the economy was set for a secular expansion, the stocks of the mid-tier companies should be performing better.
Since expectations of the Federal Reserve tapering began to increase about a year ago, the performance of the high-end stocks and discounters generally continued to perform well while the mid-tier began to decline. Shares of Wal-Mart are up 8%, and Target has actually lost about 3% since then.
In the last three months, however, since tapering began, only the high-end stocks are still showing positive performance. Nordstrom is up 1%, and Macy's is up a whopping 25%. Wal-Mart, Target, Dollar General and Dollar Tree are down 1%, 8%, 2% and 10% respectively.
Both consumers and investors appear to have arrived at the conclusion that an imminent increase in economic activity is unlikely and that the opposite is more likely, contrary to the current dominant financial media meme and official Fed announcements.