Profit from the Fickle Consumer

So this morning we have confirmation the consumer is not opening his wallet or her purse and parting with cash, swiping that credit card or debit card. At least, not across the board. Confirmation of that can be found by comparing Restoration Hardware (RH)'s better-than-expected quarterly performance with that of Lululemon (LULU), which reported results this morning. Ahead of the open LULU shares are looking to open down more than 16% following a downward revision to its full year outlook. The company now sees adjusted earnings per share more in the range of $1.71-$1.76 vs. the prior $1.80 to $1.90 range. LuluLemon also trimmed the top side of its 2014 revenue forecast modestly. As I have said for some time, consumers in 2014 are far choosier than in prior years. The reason is that they are seeing their disposable income under pressure. Now, I'm not going to once again bang the drum on rising protein prices, but I will say that we are now seeing dairy prices climb. We know gas prices are higher, and recent manufacturing reports from ISM and Markit reveal upward price creep is occurring there as well. I can also say that while the Energy Information Administration is forecasting summer gas prices to peak near $3.65 per gallon or so, I am already seeing gas prices at the pump well above that. As I see it, we are witnessing a different kind of spending than we have in past economic recoveries. While the economy is moving forward, it's not happening across the board; job creation is not robust, and in most cases it is an employers' market, not an employees' one. With slack in the job market, we have not really seen a pronounced upward move in wages even though unit labor costs have crept higher -- thanks to Obamacare. Stripping out luxury sales and focusing on the average consumer, I see two types of spending: necessities such as food, personal care products and the like on one hand, while on the other, guilty pleasures -- alcohol, chocolate, coffee, and the like. In yesterday's Corner of Wall & Main, I mentioned Procter & Gamble (PG) and Colgate Palmolive (CL) as beneficiaries of this shift. Another company that supplies key ingredients to those kinds of companies as well as to perfume manufacturers like Coty (COTY) -- which delivered impressive March quarter earnings results) -- is International Flavors & Fragrances (IFF). Long-time Real Money Pro readers know this bullet, or food chain method of investing, is one of my preferred strategies. Sifting through today's disappointing retail sales report for May confirms the third type of spending -- whether you call it online or e-commerce, the reality is more consumers are buying more over the internet. To me, that speaks volumes for Amazon (AMZN) shares as well as those select retailers that have figured it out. Macy's (M) is a great example. Amazon shares have started their climb, but between now and the end of the year there is far more reward than risk at the current share price. One stock to watch over the coming months if not weeks is United Parcel Service (UPS), which is an indirect beneficiary from the ongoing shift from bricks and mortar to online shopping. One quick aside, there has been a lot of chatter over the growing acceptance of Uber and similar services as to what the impact will be on auto sales. I think many are missing the far more likely target -- taxis! To me a far more vulnerable company is Medallion Financial Corp. (TAXI)

Profit from the Fickle Consumer

Spending patterns are different in this recovery.

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