Consumer Revolution: Unbranded Retailers Are Stealing Market Share

 | Aug 03, 2016 | 4:00 PM EDT
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As I referenced in yesterday's column, "OK Fellas, Buy a House, Not a Harley," I'll revisit the issue of the branded versus unbranded apparel retailers, and what their performance implies about the possibility of younger-adult consumers shifting their spending toward housing.

But first, a preview of my weekend column: I'll be writing about the single-biggest issue that could derail a return of first-time home buyers to the market, even if all of the other trends -- including sub-3%, 30-year, fixed rate mortgages -- occur. That issue is health care expenditures (HCE) and the probable implications for the health care industry in the U.S. of a Clinton executive administration. It will be a continuation of my column, "The Black Hole of Health Care Expenditures."

Now, back to the main event for this column. Over the past three years, I've discussed the increasing trend of consumer spending on apparel toward unbranded names -- and away from branded names -- as an indication of the attempt to use substitutes, where possible, in an environment of stagnating incomes.

That trend has continued unabated, and shows no signs of reversing.

In the past six months, since I last addressed the issue, all seven of the stocks of unbranded retailers I mentioned have posted positive returns, with six of them being in excess of 10%.

TJX Companies (TJX) is up by 12%, Ross Stores (ROST) is up 10%, Burlington Stores (BURL) by 38%, Action Alerts PLUS holding Costco (COST)  by 13%, Walmart (WMT) 10%, and Growth Seeker holding Amazon (AMZN)  by 43%.

The only one up less than 10% is Target (TGT) , which is up by 2%.

Only four of the 11 branded retailers I've been tracking are positive over the last six months, and two of those 11 have gone out of business in the last year: ANN (ANN) was taken over by Ascena Retail Group (ASNA) , and Aeropostale (ARO) is being liquidated.

The positive performers are American Eagle Outfitters (AEO)  -- up 26%, PVH (PVH)  -- up 22%, Urban Outfitters (URBN)  -- up 20%, and Ascena (ASNA) -- up 3%.

The five remaining stocks are all negative; Abercrombie & Fitch (ANF) is down by 26%, L Brands (LB) by 24%, Ralph Lauren (RL) by 19%, Express (EXPR) by 15%, and The Gap (GPS) by 1%.

What's most notable about the stark difference in performance of both groups is that the unbranded retailers, with the exception of Amazon, are still primarily -- and in some cases exclusively -- brick and mortar retailers. But the branded retailers all have online distribution channels through Amazon, by themselves, or both.

The increasing convenience offered by Amazon, and the number of consumers using it, as well as online retailing generally, should theoretically be causing the branded retailers to perform better -- if consumers' preference for that brand was actually stronger than the inconvenience of having to drive to a discounter.

This does not, in itself, indicate that young people are necessarily putting the savings toward first-time house purchases, but it does comport with all of the other trends that suggest that is happening.

But the other thing that all of these trends signal is the decline in disposable and discretionary income, as seen with the reduction in payroll tax receipts received by the U.S. Treasury -- which I last addressed in the column, "Why Long-End Treasury Yields May Grind Lower."

The contraction in seasonally adjusted payroll tax receipts continued in July, and although the 10-year U.S. Treasury yield has risen by about 20 basis points since then, the negative adjustments to GDP recently released by the Bureau of Economic Analysis appear to validate those stagnating economic conditions - which we see in the payroll tax receipts, vs. the labor and wage estimates offered by the BLS.

With the BLS reporting July's employment situation on Friday, it's prudent to bear this in mind.

One critical aspect of the GDP revisions is that they included the "residual seasonality" adjustments that were expected to cause first-quarter GDP to increase, which I discussed in the column, "Applying 'Residual Seasonality' to GDP Doesn't Do Any Good."

The GDP adjustments mean that the BEA and U.S. Treasury are now much more closely aligned with respect to real economic activity, and the outlier continues to be the jobs and wage numbers provided by the BLS.

Regardless of what the BLS reports on Friday, the overall economic data available continues to support the case for declining long-end treasury yields and mortgage rates, in my opinion.

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