Let's begin the day by having a look at two telling year-to-date charts.
Are you feeling those charts? Huh? It's OK. You can admit it. You know what I am not feeling? The lagging performances of those two consumer-facing indices relative to the S&P 500 and DJIA so far this year.
Jobs growth is relatively solid, settling into a decent 200,000-a-month range. Wages are middle-of-the-road, not falling but surely lacking oomph. The stock market has surged in the past couple years, theoretically giving more disposable income to families who actually own stocks and providing a bit of trickle-down money to those who do not.
- Very few business models consistently command premium prices for their goods and services. Even luxury purveyors Michael Kors (KORS) and Kate Spade (KATE) are using discounts to drive sales.
- Companies are pouring money into technology initiatives, but due to sluggish pricing, the returns on investment just haven't been there. Some of these website designers are pulling in well north of $300,000 a year, and are they getting hired hand-over-fist by retailers.
- Online price discovery is worsening the outlooks for many retailers with large physical store footprints.
- International growth seems to be a little less powerful over the past year. Under Armour (UA) is an exception, ditto Starbucks, but overall I am not hearing the same degree of enthusiasm about international sales and margin opportunities from executives.
Given the above items, I expect a wave of consolidation in the consumer sector over the next 12 months. I am talking restaurants, retailers, suppliers to these companies, you name it. Consolidation has to happen so that these companies can run more profitably longer-term in the new normal global backdrop. I also expect more restructurings, possibly a company going the route of the beat-up Darden Restaurants (DRI) and selling its version of Red Lobster.
Below are a few items to look for in a company that could restructure to surive and thrive longer-term:
- The company has multiple brands -- for example, DineEquity (DIN).
- The company deals with a ton of suppliers -- for example, Family Dollar (FDO) or Dollar Tree (DLTR).
- The company is on its last financial lifeline -- but is not a destroyed entity -- for example, Aeropostale (ARO) not RadioShack (RSH).
- Insiders have been buying the stock in the past three months, likley suggesting efforts in the works to sell assets or restructure, both of which could boost earnings power.