The S&P Retail Index has lagged the recent rally in stocks, rising about 1.4% over the past month compared to a roughly 6% gain for the Dow Jones Industrial Average. In the past three months, the retail index has shed about 3%. Can anyone blame investors for being cautious on the sector? September retail sales rose 0.1%, missing forecasts for a gain of 0.2%. Excluding sales of autos, retail sales plunged 0.3%, the biggest decline since January. Wall Street was forecasting a 0.1% drop. Sales fell in 7 of 13 merchandise categories -- and all of this happened during the key, back-to-school shopping season. To add insult to injury, retailers voiced concern on how the third quarter began.
It's important to understand why traditional retailers such as Macy's (M), Wal-Mart (WMT), and Sears (SHLD) are struggling mightily this year. Consumers are out there spending their gas savings and modest raises, it's just that what they are buying with the money is fundamentally changing.
Once-a-year, high-profile experiences: The 3Q results from cruise line industry names, such as Carnival (CCL), Royal Caribbean (RCL) and Norwegian Cruise Line (NCLH), were nothing short of stellar. Prices for cruise vacations are up this year, beverage-package prices are higher, and there are new costs for trips --like high-speed Wifi. Each of the cruise companies has improved their marketing to target younger people, and the bait is being taken.
All in all, consumers are spending big to set sail to foreign destinations, or to take two-day cruises to nowhere on fancy new ships. I think the money to take these trips is being saved throughout the year, rather than being recklessly placed on a charge card. It's money that, in years past, went to a new Coach (COH) or Michael Kors (KORS) handbag (both had weak results in the U.S. for 3Q). Furthermore, a cruise gives a person great social currency: tons of photos and multimedia to be shared on Facebook (FB), Twitter (TWTR) and Instagram for years, which is way cooler, these days, than buying another pair of blue jeans at 25% off at Bloomingdales.
Daily habits: With the economy not completely on life support this year, consumers are visiting the likes of Starbucks (SBUX) more than once a day. How else could you explain the company's absurdly strongly U.S. traffic during 3Q? New mobile order technology is a facilitator for Starbucks, but the evolved mindset of the consumer to spend more on daily vices is the fundamental driver. Money has also gone into eating out, perhaps on both Friday and Saturday instead of just a single day. Again, people want to support their habits that drive experiences with a community, and that is coming at the expense of a shopping trip to Macy's on a Sunday.
Better products that go into your body, or touch it: We are experiencing an innovation boom among consumer-products companies and organic-food players. For a company such as Clorox (CLX), its strong results this year have been fueled by sales of new premium products -- like splashless bleach and disinfecting wipes. These are products that are priced more than, say, regular bleach: These products offer consumers what they believe is a service that is worth the couple of extra bucks. Within the aisles of Target (TGT), the organic-food sections have become pretty impressive. Ultimately, I think the company will outsource its food business to a grocer like Kroger (KR) or Whole Foods (WFM). Buying more organic food and premium household cleaning products chips away at the budget, each month, and it's probably money that was spent at a Kohl's (KSS) in years gone by.
These fundamental shifts in what people are buying is very likely to appear on the profit lines for retailers as they start to report this week. There are also other factors in play that will likely weigh on the stocks, including:
- A warmer-than-normal winter that is delaying sales of boots, sweaters and jackets. According to Accuweather, El Nino is poised to keep temperatures 1 to 3 degrees higher than normal for this November. A delay in buying winter essentials raises the prospect of unplanned discounting, this holiday season, and a high probability for cautious fourth-quarter same-store sales and earnings guidance. Names particularly exposed to warm weather include Deckers Outdoor (DECK), Columbia Sportswear (COLM) and V.F. Corp (VFC). Shares of these three companies are down an average of 4.5% in the past month. Deck, colm, vfc
- There hasn't been much in the way of must-have new fashion. The athleisure trends have grown a bit long in the tooth. In short, retailers just don't have the wow product on the floor, today, to wrestle consumers away from buying things that support daily habits or desire for fun experiences.
- Greater availability of the Apple Watch. The smart watch may not be the runaway hit Apple (AAPL) hoped for (the new Samsung Gear could take a bite out of the Apple Watch this holiday season -- product looks great), but people are buying the thing as it has become more available.
