The U.S. consumer may be feeling happier now that he is back to driving his General Motors (GM) car to a higher-paying job on cheaper petrol, but investors in consumer stocks may have forgotten something.
Not every part of consumer land is experiencing fast growth.
The Market Vectors Retail ETF (RTH) and Consumer Discretionary ETF (XLY) have tacked on a cool 4.75% and 4.34% respectively in the past month, as investors bank on bumper sales and profits from consumer-centric companies this spring. What this equates to is that from the mountain of earnings guidance ranges soon to be put forth by retailers and others in the weeks ahead, investors best get their pound of flesh. A pound of flesh would resemble the earnings news at Whole Foods (WFM) that surfaced Wednesday evening:
- A quicker rate of transactions growth in the final quarter of 2014 vs. the third quarter. In plain English, consumers visited Whole Foods more often in the winter than in the summer when gas prices were higher and consumer confidence measures not yet back at pre-recession levels.
- Quarter to date comps for Whole Foods accelerated from the stronger trend seen in the fourth quarter. Whole Foods quarter to date comps as of Feb. 8 were up by 5.1% compared to the 4.5% result to cap off last year. Am I surprised by the healthy sales growth that Whole Foods logged? Nope, it was strongly hinted at in my interview with co-CEO Walter Robb for TheStreet on Dec. 18.
If not inclined to jump into Whole Foods shares at this point given its relative valuation, consider something like a Hain Celestial (HAIN). Its portfolio of health and wellness brands, such as juice cleanse drink Blueprint, is helping to feed Whole Foods' results and is generally not being targeted for sharper price points by the organic grocer -- and at Target (TGT), where the Blueprint brand has started to appear in refrigerated coolers.
As for what the market may be forgetting as it pertains to consumer stocks, and why I am hesitant on recommending significant sector exposure, the list is straightforward. These factors certainly put the Street's 2015 earnings estimates for many consumer companies, particularly retail, at risk of being lowered:
There are dead areas at department stores: Nike (NKE) activewear may be selling briskly at Macy's (M) and Under Armour (UA) (it is), but Levi's jeans and other basic apparel -- such as from Ralph Lauren (RL), which warned last week -- remain very price competitive. The dollars that normally would be allocated to apparel when gas prices decline are now being spent on new Starbucks (SBUX) breakfast sandwiches or a Dunkin Donuts (DNKN) croissant donut (which became a permanent menu item yesterday for the company, as TheStreet reported last week). I think the Street is estimating that a majority of the areas in leading department stores are realizing solid sales and reasonable margins, and that simply is not the case. There will be more Ralph Lauren-like disappointments soon.
Execs are currently in slash and burn mode: The exec changes at retailers and consumer companies over the last three months have been plentiful, and noteworthy in terms of who is getting axed. In fact, I can't recall another time in my 11-year career when high-profile consumer execs have been shown the door so quickly after the year has closed, and without even the slightest hint to average investors the maneuver was coming. At the moment, I think execs in the sector that have not been canned are scared of being canned or having a social media savvy activist investor appear on their doorsteps. That means teams are prepared to book disturbing earnings charges to exit unprofitable/barely profitable businesses, or close stores. As for the new execs, decisions like we are seeing from Target's new chief Brian Cornell to shutter a fledgling online streaming video service and send HQ people packing are examples of near-term factors that present risk to multiples on the companies. However, I will say that in the situation of Target, Cornell's actions are long overdue and welcome, and underscore why I became bullish on the name months ago.
Reminder: Under Armour
As I pointed out earlier in the week, Under Armour will be having an event this evening to unveil the new Steven Curry basketball sneaker. I believe this is an important achievement for the company as it attempts to gain more credibility and retail shelf space in the sneaker category. Pay attention to my Twitter feed around 5:30pm EST @BrianSozzi as I will be in attendance.