Retailing

Overall consumer spending growth has been sub-par, as the windfall from lower energy prices has translated largely into a high personal savings rate rather than increased consumption growth. As a result, performance among retailing stocks has become highly fragmented, as marked divergences in spending among specific retailing industries are developing. Investing alongside top-line trends tends to pay off. The latest retail sales report showed the industries such as hypermarkets and retail drug stores are experiencing accelerating top-line momentum (top and second panels), consistent with a more discerning consumer. That bodes well for related-industry profit outperformance and valuation expansion. Conversely, restaurant sales are slipping, similar to the cautious message from the National Association of Restaurants. We are overweight retail drug stores and hypermarkets, but underweight restaurants. bca.uses_in_2016_04_14_002_c1 bca.uses_in_2016_04_14_002_c1

The previous Insight outlined the case for good building supply store sales growth, but an aggressive rise in wage inflation and intensifying deflation pressures may provide a negative offset. Meanwhile, the gap between house price inflation and mortgage rates has slipped below zero (second panel), suggesting that the financial incentive to buy and renovate a home has eased, on the margin. It is notable the retailing CEO confidence has taken a sharp turn for the worse in recent months, as this series often provides a good lead on industry sales trends. Souring confidence may reflect deflationary pressures. Importantly, our Home Improvement Retail model, which incorporates leading top and bottom line indicators, has not confirmed the advance in relative share performance into overvalued territory. Against this backdrop, we recommend only a market neutral weight. The ticker symbols for the stocks in this index are: HD, LOW. (Part II) Can Home Improvement Retail Sustain Its Momentum? (Part II) Can Home Improvement Retail Sustain Its Momentum?

Both Home Depot and Lowe's produced strong profit results in the most recent quarter, aided by a warm winter weather, which pulled forward sales of many products. The odds of the industry maintaining decent sales momentum are good, given that ultra-low mortgage rates should sustain housing turnover (second panel). Banks are still willing to extend mortgage credit, as rising house prices provide confidence in underlying asset values. Nevertheless, extrapolating future store traffic growth straight down to the bottom line risks being too optimistic. The industry has hired aggressively to meet rising demand, and deflation still plagues the industry (bottom panel). Deflation amidst good store traffic also suggests that a serious market share battle is raging, which means meeting this year's aggressive industry earnings growth estimates is not guaranteed, please see the next Insight. The ticker symbols for the stocks in this index are: HD, LOW. bca.uses_in_2016_02_25_001_c1 bca.uses_in_2016_02_25_001_c1

The latest National Association of Restaurant survey showed a sharp slowdown in activity, with same store sales contracting for the first time in years. This is not an aberration. Despite rising real disposable incomes, consumers are pulling in their horns, as evidenced by the rising personal savings rate (shown inverted). The implication is slowing revenue growth for the restaurant industry at a time when wage growth is running hot. This was the motivating factor behind our downgrade to underweight late last year. The silver lining in this dark cloud is that consumers are likely to allocate dollars not spent dining out to the retail food store industry. That is supportive of grocery store pricing power. The chart shows that retail food stocks generally trend inversely with restaurant stocks. We are overweight the former and underweight the latter. The ticker symbols for the stocks in the S&P retail food stores and S&P restaurants are: KR, WFM, and MCD, SBUX, YUM, CMG, DRI, respectively. bca.uses_in_2016_02_10_002_c1 bca.uses_in_2016_02_10_002_c1