Retailers’ slowest earnings growth since the last recession has them bracing for a weakened second half as the U.S. economy leaves consumers confronting the prospect of losing their jobs and a volatile stock market.
Second-quarter earnings per share for 43 retailers in the Standard & Poor’s 500 Index gained an average of 11 percent, the smallest increase in eight quarters, according to data compiled by Bloomberg. Profits rallied 71 percent on average in last year’s second quarter and declined 2.2 percent in the three months through June 2009, when an 18-month recession ended.
Wal-Mart Stores Inc. last week said its lower-income consumers, concerned about losing their jobs with the U.S. unemployment rate at 9.1 percent, are trading down to lower-priced brands and smaller sizes of goods to stretch their paychecks. Wealthier shoppers may retreat from luxury purchases as the stock market falls, analysts said.
“There are a lot of clouds on the horizon,” Bernard Sosnick, an analyst at Gilford Securities in New York, said in an interview. “Consumer confidence is heavily influenced by outside factors such as the stock market and political uncertainty and all the things that made headlines.”
Confidence among consumers in August fell to the lowest level since May 1980, according to a survey from Thomson Reuters/University of Michigan. U.S. stocks posted unprecedented swings in the week of Aug. 8, and the Dow Jones Industrial Average has dropped 14 percent in the past three months to close at 10,817.25 on Aug. 19.
U.S. gross domestic product climbed at a 1.3 percent annual rate from April through June following a 0.4 percent gain in the prior quarter, the Commerce Department reported last month.
The stock-market decline and weaker confidence make a double-dip recession more likely, said Michael Souers, a retail analyst at Standard & Poor’s in New York. He recommends stocks that perform well in economic slumps such as PetSmart Inc. and Advance Auto Parts Inc., the only company of the 30 he covers that he ranks a “strong” buy.
“The economy will remain weak,” Souers said in an interview.
Consumers are pushing back against price increases that some stores are trying to pass through from vendors, said Ed Yruma, an analyst for Keybanc Capital Markets in New York.
Bon-Ton Stores Inc. said shoppers resisted an increase of 8 percent, or $1 to $2, on basic products such as children’s clothing. Sears Holdings Corp.’s net loss widened in the quarter as it discounted merchandise to clear items from stores and reduce inventories.
“It looks a lot less likely that retailers have the ability to raise prices,” Yruma said.
Customers of department stores and luxury retailers, who have reported some of the strongest gains this year, may be most affected by the recent market turmoil, said David Schick, an analyst for Stifel Nicolaus & Co. in Baltimore.
“Higher-income consumers are flat-out less confident than they were and less wealthy than they were,” Schick said.
There’s no indication that retailers are bracing for the sort of meltdown that followed the collapse of Lehman Brothers in 2008, when people didn’t show up for sales during the Labor Day holiday weekend, Sosnick said.
Retail sales in the U.S. in July climbed 0.5 percent, the most in fourth months, the Commerce Department reported Aug. 12.
Wal-Mart, based in Bentonville, Arkansas, said second-quarter net income climbed 5.7 percent and that profit in the fiscal year ending in January will be $4.41 to $4.51 a share, up from a previous projection of $4.35 to $4.50.
Target Corp., the second-largest U.S. discount retailer after Wal-Mart, reported second-quarter profit that gained 3.7 percent to $704 million, or $1.03 a share, topping analysts’ average estimate of 97 cents.
While sales growth for Minneapolis-based Target slowed in the first two weeks of August from June and July, the decline matched the company’s expectations, Chief Financial Officer Douglas Scovanner said on an Aug. 17 call with analysts.
“These are not the signs of a consumer that’s leading us into some great catastrophe,” Greg Melich, an analyst at International Strategy & Investment in New York, mentioning positive results at leading retailers including Home Depot Inc. “This is very different from ‘08,” when even higher-income Americans feared losing their jobs and credit markets stalled.
Atlanta-based Home Depot, the largest U.S. home-improvement retailer, raised its full-year profit forecast after second-quarter profit exceeded analysts’ estimates, spurred by increased traffic.
Sosnick said that while he once thought a consumer freeze similar to 2008 may happen, he’s less pessimistic after the most-recent earnings reports.
“I don’t think we have that kind of shock right now,” he said. “We have fear and disgust but not paralyzing shock.”