Thanks to several factors playing out in the U.S. economy, the onset of spring weather may not lead to overstuffed registers for retailers.
Gap's (GPS) major sales miss last week should have been a rude awakening to economists and those interested in investing in retail. Although the sales shortfall stems in part from poor selections at Gap and Banana Republic, the fact is U.S. consumers continue to not be in the mindset to invest in apparel (more on this, below). Elsewhere, Gap's sales shortfall comes on the heels of several developments in retail that deserve to get more attention by macro fans.
First is the Chapter 11 filing of teen retailer Pacific Sunwear (PSUN). In my opinion, the company has made numerous operational missteps over the past five years that have set it up for failure. But PSUN's filing with the bankruptcy courts last week also reflect ongoing high levels of teen unemployment post-Great-Recession, and the inability (or unwillingness as they enter retirement) of parents to spend on their children as in years past. Additionally, going back a few months, Dollar Tree (DLTR) ¿ which caters to people on very strict budgets -- eported another quarter of slowing sales growth. The company pinned the blame on several factors in the U.S. economy, ranging from high levels of unemployment in once oil boom towns and rising costs of living. To top it off Macy's (M) -- which should be viewed as the pulse of the American consumer -- continues to underperform against its sales plans and surprise Wall Street with weak profits.
There are fundamental reasons why these things are happening to retailers this year, despite U.S. households having socked away an extra $700 last year from cheaper gas prices and perhaps seeing their average weekly incomes rise slightly. As a result of the continued underwhelming numbers by retailers, it's hard to not be concerned about the stocks at currently levels: shares of the Market Vectors Retail ETF (RTH) have gained 1.6% in the past six months versus a 0.6% drop for the S&P 500. One should expect more Gap-like sales warnings in the weeks ahead from retailers, pressured stock prices and slashed outlooks for the full year. The only thing that would lessen the blow -- but not reduce it entirely -- is really warm weather in April that sends people out in droves to buy shorts, t-shirts, sandals and food for a weekend barbecue.
Top Economic Concerns Plaguing Retailers
Shelter Costs: According to the Bureau of Labor Statistics, costs for shelter rose 3.3% for the 12 months ended February 2016. The increase represented the largest 12-month gain since the period ending September 2007. Renters are stuck in a precarious position. those renting the homes realize the supply of homes remains tight, so owners are in the driver's seat with respect to pricing. As for those unable to buy a home due to their financial standing, here is the reality: Hourly wages have only gained about 2.3% in the past year, lagging the increase in rent costs. Money to pay for shelter has to come out of somewhere, and it is likely coming out the limited funds once set aside for a new shirt or an extra item in the grocery basket.
The outlook for rent prices remains unfavorable, too. According to recent data from Realtytrac.com, rents may rise about 3.5% across the country this year due to low vacancy rates. A new survey by Rent.com was even more unflattering, projecting a potential 8% increase in rent rates in 2016.
Healthcare Costs: Meantime, many economically sensitive households now have a new expenditure to deal with in Obamacare. And this year, that expenditure could cost more to service each month. The average price of healthcare premiums under Obamacare will rise by an average of 12.56% nationally in 2016, according to data released by the Robert Wood Johnson Foundation.
Psyche of Retirees: The conventional wisdom has been that retiring baby boomers would be poised to spend, spend, spend, now that they have more time on their hands. In some cases that is true, but in the majority of instances these are folks trying to protect their nest eggs after seeing them blown to pieces in 2008 to 2009. With the market all over the place so far in 2016, I think retirees are back to protecting their nest eggs and will wait for the market to pick back up before spending more aggressively.
It's worthwhile to keep some numbers in mind. In the six-year period between 2008 and 2014, the number of retired Americans increased by 7.4 million, which was the largest six-year increase in U.S. history, and more than triple the 2.4 million increase in the previous six-year period. As more people retire, this is pulling peak earners out of the economy -- the same people that for years frequented malls to buy their kids gifts and spent on eating out frequently during the week. Retailers are starting to feel the impact.
Tighter Food-Stamp Guidelines: As of Jan. 1, able-bodied, childless adults aged 18 to 49 must work, get job training or volunteer 20 hours a week -- or else have their food assistance limited to three months in each 36-month period. The first three months were up on April 1, meaning hundreds of thousands of people will likely get cut off from assistance. The food assistance totals as much as $194, money that was likely spent in the aisles of low-cost retailers such as Wal-Mart (WMT), Dollar Tree and Dollar General (DG).
A Continued Fundamental Desire to Save: The personal savings rate hit 5.4% in February, matching its highest level since the end of 2012. Consumers continue to show a desire to spend on experiences such as cruise vacations or a Netflix (NFLX) subscription. While that is good to see, the spending on experiences is coming right out of the pockets of mall retailers and, to a lesser extent, restaurants.
Store Concentrations in Oil States: Many retailers and restaurants have large store concentrations in places such as Texas and Oklahoma, where the fallout from low oil prices has caused consumers there to rethink spending. Not having a job or a hot lead on a new one will cause households to go to extremes to save money. Happy hours at restaurants have become sharply priced at places such as Brinker International's (EAT) Chili's division, while sales have just started to slow at mall retailers. With key oil states continuing to be under pressure, retailers will see their results affected.