I believe many households remain under severe financial stress. By that I mean that people are rationing food because a dollar store trip is too expensive -- as seen in the most recent results from Carl Icahn's Family Dollar (FDO). Ultimately, I believe the 2014 back-to-school selling season will start on a weak note; sales are likely to be heavily weighted towards the last few days before school. When I first started in the stock business, retailers would begin to experience building momentum in each week of back-to-school starting in August, climaxing with strong sales by the second week in September. That is no more; it was very much a function of the credit bubble environment of 2004-2007 (my career began in 2004).
If you look at the same-store sales for the fast food restaurants, they suggest August earnings season for retailers will be brutal. Wal-Mart (WMT) could issue another earnings warning. Aeropostale (ARO) could have ugly things to say to investors after a year of saying ugly things to investors. For Target (TGT) too, the quarter is likely to be poor. Bottom line: if you are in the mall or a strip center and not selling Chipotle (CMG) burritos, new Starbucks (SBUX) shaken iced teas, or the latest specialty chicken from Domino's (DPZ), then pressured margins are the name of the game.
The consumer is voting. It did so in Harley Davidson's (HOG) results, with a guide down to its full-year shipment guidance. It also happened, as I predicted months ago, within consumer packaged goods companies such as Kimberly-Clark (KMB). Eventually, the stock market will pay attention (maybe when QE is done).
Concerns for All Things Consumer
- Unfavorable product mix driving same-store sales. This is why Starbucks sticks out as a winner: its product mix is helping to support profit margin expansion. I expect a rock-solid quarter from the company, and a bullish earnings call. Focus for me is not really mobile payment but the attach rate, or the amount of food being added to a ticket that used to only contain a caffeinated beverage. I also anticipate Starbucks making other food/snacks based acquisitions within the next year.
- Lack of leverage over labor, occupancy, and operating expenses. Thus far, higher labor costs are the general theme on earnings calls. The higher labor costs are good for the economy, I suppose, but bad for those companies devoid of innovative, value-creating new products and services. Even mighty Chipotle experienced a bit of wage inflation and operating margin constraint.
- Early optimism for the holidays. Hasbro (HAS) and Mattel (MAT) had inventories situated quite aggressively exiting the second quarter, a bet that the consumer will be out there, shopping freely this holiday season. Given what I have watched year to date, execs at both companies may have set their companies for discounts and weak earnings as excess inventories are cleared.
Sales Comparisons: Restaurants
McDonald's (MCD) U.S. Same-Store Sales
- 4Q12 +0.3%
- 1Q13 -1.2%
- 2Q13 +1.0%
- 3Q13 +0.7%
- 4Q13 -1.4%
- 1Q14 -1.7%
- 2Q14 -1.5%
Domino's U.S. Same-Store Sales (franchised)
- 4Q12 +4.7%
- 1Q13 +6.2%
- 2Q13 +0.7%
- 3Q13 +5.4%
- 4Q13 +3.7%
- 1Q14 +4.9%
- 2Q14 +5.4%