Wed, 14 Nov 2012
Retailers are right to expect a better November as consumers bounce back following Sandy and continue holiday shopping, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
The retail sales report this week came in a little bit light. It was down a tick or two from consensus estimates.
Here to talk about his view of the report and what he expects for the months ahead is Bob Johnson, our director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: The report was a bit underneath consensus. Tell me about that headline number, and did it meet your expectations?
Johnson: The headline number [showed] retail sales were down 0.3%, and people thought maybe they'd be down 0.10%.
What happened is we had a really great September, and there were things like the iPhone that really helped September that we knew weren't going to help October. And September numbers in general very strong, kind of not sustainable, and we had warned about that. And sure enough we got a little bit of payback this month.
The number was in line with what I had been thinking, probably a little bit weaker than consensus. But given what I had thought about the iPhone and a couple of other things in there, the numbers [for October] don't surprise me at all.
Stipp: So if you looked at that two-month chunk, September and October, to kind of pull out some of that noise, what does the trend look like then?
Johnson: I think we're pretty good. I think we're still relatively intact, although I like to look at the data year-over-year, too, and there we're just a little soft. We've been in that 4% to 6% range year-over-year. We ticked just under 4% for the first time here in a while, at 3.7% year-over-year growth. At the month-end, we did have some Sandy impacts on the numbers that we can talk about.
Stipp: So let's talk about some of the underlying data and the storm, which did hit at the end [of the month]. A couple of notable things in the underlying retail sales [report] were gas and groceries, and you think there's some storm effect. Let's talk about that.
Johnson: Those are on the positive, then we'll talk about autos on the negative.
Gasoline was actually up 1.5% in the month, and that's in terms of sales dollars, and that came as a bit of a surprise, because prices were actually down during the month of October. So we would have suspected that we would have seen a decline in that number, but apparently there was some buying in anticipation of the storm that pushed that number up a little bit.
Stipp: So this report is not inflation-adjusted.
Stipp: So if you're seeing [growth in gasoline sales while gasoline prices were declining], it means there was more demand.
Johnson: Yes. And even without that, the 1.5% growth in gasoline sales was a bit surprising in terms of its strength. And then food being up 0.8% was probably people stocking up for the storm.
Stipp: And then on the flip side you mentioned autos and I think also building materials [were weaker]. What can explain some of that?
Johnson: Well, the autos … were down 1.5%, so a pretty big number, and that's a pretty big part of the report. And we'd already known that was going to be a weaker part of the report. It was another reason why people weren't anticipating a lot [for October retail sales]. Remember we had 14.2 million overall units of cars sold in October according to a separate report, down from 14.9 million, and lo and behold, that's the same pattern that we saw in the retail sales numbers here.
Stipp: And then on building materials, is that just we haven't seen housing kick in yet, or is there some storm interruption there?
Johnson: People don't buy the big-ticket items [in front of a storm]. They run out and buy lanterns and so forth, and maybe generators, if there were enough in stock. But then they don't buy the kitchen cabinets and some of the bigger items--they've get other stuff to worry about for now.
Stipp: And you mentioned that year-over-year, we're seeing a little bit of softness from that range that you like to see, which is the 4% to 6%. We're just under 4% now when you look it that way.
How much of a concern is that, and what's behind some of that? So is it the storm? Does that account for all of that [softness]?
Johnson: I think there's been just a little bit of softness in the retail numbers. Some of it is price related. We hear again and again from our retail analysts that people have not been able to raise prices. And I think they took a lot of the price increases a little bit earlier in the year, when inflation rates will were little higher. Now as things have backed off a little bit, they haven't necessarily lowered their prices, but they certainly aren't raising them. Of course, that was always a little tailwind to these numbers over time: the inflation rate, which is now quite a bit lower than it was, say, even at the beginning of the year. So that's certainly one of the things [behind the retail sales softness]. And that's a good thing, actually.
Stipp: For consumers.
Johnson: For consumers, but it makes these numbers look a little bit soft.
Stipp: Let's talk about holiday shopping, because it's begun now. We have some evidence that people have already started to shop.
How is that going to enhance the numbers in the months to come, and we're also still going to see some impact from Sandy in the months to come as well. How are you going to pull those apart and really see how we're doing?
Johnson: We're just going to have to watch the numbers very carefully, and the main thing I am going to be looking for is that things just don't fall completely out of bed. There are some weekly numbers that I can talk about that I'll look at. But let's go to holiday season first.
General expectations from retailers are for 4% or more [sales growth] this holiday season, which is a little bit ahead of where it was a year ago. So that's the good news, and the mix of what that happens to be might change a little bit [because of Sandy], but that's still the general expectation out there. …
Now that we've gotten into November, the International Council of Shopping Centers provides us with people's shopping intentions and how much of their shopping is already completed, and again you don't want the number to be really high, meaning they're all done shopping. You don't want it to be really low, which means people are glum, and we're probably off to a pretty slow start. And we're somewhere right in the middle there. This month's survey [indicated that] about 33% had completed most their holiday shopping. … Last year that same number was about 34%, so down a little bit from last year, but way up from our average, which is 28% for this point in the shopping season. So I think we're off to a relatively good start here, even despite the storm.
Stipp: So the retailers are expecting some good growth on holiday shopping. It looks like we're getting off to a good start, as you said.
What effect will the storm potentially have, though? Is it pent-up demand that they couldn't shop because of the storm, and we're going to get that later? Or is there going to be an interruption where they are not able to shop because they're dealing with the aftermath of the storm? How do you expect it to play out?
Johnson: I've got to … look at the numbers carefully however they come in, but in general, I would think that some of the shopping will be made up for, and certainly we've seen some of that already: I get the shopping center data on a weekly basis, and that showed some pretty low growth the week the storm hit, at 1.4%, but [the storm] didn't take the number all the way negative. And given that 25% of the population center [was affected by the storm], [the fact that] that number didn't go negative for that period was actually a little bit of surprise to me.
And then it went from 1.4% [growth the week of the storm], this week it was 1.8%, so still below the trend that I like to see of about 2.5%-3%, but clearly we're already moving back in the right direction, and the shopping center people also put an estimate out for November, and they are thinking 4%-5% overall growth, so, they are thinking we're going to have some better weeks here in front of us--we're going to have some make-up time. Some of the stuff that we didn't buy, we couldn't even get to the store, the store wasn't opened, but it's a necessity and I need it, [those goods] will get bought … later. People have raided their pantries, and now they are going to have to restock them, so to speak. And I think that's why they are optimistic. And I think they are probably pretty close to right on that, that we will end up growing 4% to 5% [in November retail sales].
But we will see maybe a little bit of a mix change. Maybe it won't be so much gifts, maybe it won't be so much luxury items, maybe it will be more necessities, maybe it will be more building materials, and certainly we're hearing rumors of a lot more people having to buy cars, because their cars were damaged or the storm pushed the cars over the edge, so to speak, and [given that] we already had soft [auto] sales in October, November could be a big bounce-back month for autos.
Stipp: So you mentioned that year-over-year rate that you like to see. It's a little soft right now, but you expect that to get back into the range of your normal 4%-6% that you like to see year-over-year in the coming months.
Johnson: Yes, correct.
Stipp: All right, Bob. Thanks for offering the insights on the retail sales report and your forecast for the months to come.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.