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Consumers Keeping Up the Fight

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. We got the government retail sales report for February this week. It showed a 1.1% month-to-month increase. A lot of that was driven by gasoline in this non-inflation-adjusted report. So, how good was that number? Digging below the surface is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: The month-to-month number looks very good. Normally, you look a bit longer term, but you told me this time there are some interesting things to talk about in the month-to-month data. What's your take on that 1.1% and some of the hints and trends you saw there.

Johnson: Sure, overall it's a good number. It was better than expectations, better than I was looking for, and certainly indicates that maybe the payroll tax hasn't killed the consumer just yet. We were all very fearful. Especially, there were rumors early in the month about some disaster sales reports out of Wal-Mart, which is particularly affected by all the negative trends that are out there. So it was a great deal of relief to see this number.

Digging down a little bit, obviously, on the month-to-month numbers, the big driver was gasoline sales, which were up a lot, but that's up mainly not because people were buying more gasoline. It was just because prices were up. Building materials was another strong category. It was kind of out of the reach of conventional retail but also did well with the housing situation dramatically improving and probably the weather forcing people into the stores a little bit differently than they did in the past.

Stipp: So, some of the short-term concerns here were that payroll tax holiday expired so people kept less of their money out of their paychecks, and then also, as you said, gas was a big component here. People were spending more on gas because gas prices are higher. If you take both of those out, month-to-month like in the short-term, how are other retailers doing? Are they struggling because of the higher gas and higher tax?

Johnson: You know what it depends on where you are. Some of the people like the nonstore retailers, the online companies--primarily let's use as the factor there--there when you got gasoline prices up, it actually might benefit some a little bit because people are less prone to go drive or think, "I'll just punch into Amazon, and I'm done. I don't have to go driving for it."

So, certainly the gasoline in the short term helps some of that. We saw both year over year and month to month some great numbers out of the Amazon-like outlets. We were up both year on year over 15%. In fact now some of the nonstore retailers are getting to be huge. I mean they were 8.5% of retail a year ago. In one year that moved to 9.5%, so some pretty dramatic improvement there.

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Stipp: I want to dig into some of those trends in a moment, but you mentioned there, you started to talk about year-over-year numbers. This is how you generally look at the data year over year. You do some averaging to smooth some things out. When you do those calculations, how is February coming in? Is it a continuation of a decent trend for consumers? What's your take?

Johnson: I like to look at a three-month moving average, and I like to look at it year over year. And there the number is 4.1% growth. I wrote last week that I thought it'd be just under 4%. So, the fact that we're just over 4% is actually a positive. I think the actual number in the last 12 months has been 4.1% for probably five or six of those 12 months. So, it's very much on trend. It's not above or below. So, it kind of says that maybe the payroll tax isn’t killing us after all.

Stipp: So that's some good news at least for now on that. Consumers still seem to be on pace for the longer-term trends. Let's talk a little bit now about some of these lower-level retail categories, and you mentioned the nonstore retailers include Amazon. So Amazon looks like it's stealing share when you look retail sales divided by these nonstore-online, and brick-and-mortar, the department stores and some of those others. What's happening there? Is Amazon getting a lot of that business?

Johnson: Yes, absolutely. And not just Amazon. I think it's mail-order or anything like that. And again the stores aren't terribly consistent. Some stores have a separate division that they announced their sales for electronically and some don't. So, it does mix and match the numbers a little bit. But I would say that overall things like Amazon are doing very well on a year-over-year basis. I mentioned up kind of 15% or so.

Meanwhile, department-store sales are down about 4% year over year, and so that's where you probably see the biggest numbers. But for some of the other individual categories, [Amazon] has a little thumb print on it here and there too. But the biggest one that [Amazon] is hurting is the general merchandisers, and that's why you may hear a lot from your conventional retailers like, "Things are weak; things are terrible." Well, part of it is because the business is going to Amazon and part of it is because people are going to supercenters and warehouse stores, which again gain more share and looked a lot better than department stores. So, [conventional retailers] are getting hit on kind of both ends. And then the whole gas situation that's going on makes people not want to drive and spend their money on gas instead of other things.

So, clearly we got to be very careful when we analyze numbers. [Some people may say consumer spending] is bad when we look at places like Kohl's, Kmart, or whatever. Those probably aren't the best representation of the economy anymore.

Stipp: If you think broadly about the economy and the fact that we are seeing some consolidation, Amazon is obviously a big one taking a lot of share. Could it have a negative effect on employment if several department stores are losing share to this one big online superstore?

Johnson: Well, certainly that would appear to be one of the worries. Retail employment growth has been OK because they've now put more people in some of the stores maybe in an attempt to fight back against the Amazon. So, that’s the bright side of it. On the other hand, as more people do buy from Amazon, I assume they have [fewer employees] per unit sold than a conventional store would. So, then it's going to hurt employment, so you've kind of got that, "How do we compete against Amazon?" Well maybe [conventional stores] have more people and more hours. But then you've got the thing of the business clearly going to Amazon, and Amazon obviously has fewer employees per dollar of retail spent.

Stipp: Amazon is attractive to a lot of folks because you don't have to pay sales tax when you buy from them, at least not right on the spot.

Johnson: Right.

Stipp: If that changes, and they start to have to collect sales tax, do you think that you will see some of that strong share by Amazon not as strong in the future?

Johnson: It's a strong prediction, here, but I don't think we'll ever see that number move down as a percentage. It may not go up as fast as it did, but I don't think we're ever going to see it go in the other direction. I think people have enjoyed the convenience of Amazon. The high gasoline prices have kind of forced people into it. The need for convenience has certainly helped. And the [lack of] sales tax has helped some, but I think it's probably a little bit more of the convenience. And now they've got people locked in with programs like Amazon Prime that gives you free shipping. There is even talk of one-day delivery out of Amazon, and I think all of those things will probably keep that moving in a direction to hurt conventional stores.

Stipp: What about drugstores? It's another category that we've seen some variance in performance. How did those do?

Johnson: Yeah, I mean drugstores have been a really big drag on the number. Some of it's just been because of how Walgreen is in the numbers. They lost the big prescription-processing contract [with Express Scripts] but now have got part of it back. So that's beginning to show up and help a little bit. And then we've got the whole patent-cliff issue and the drugs where people move from branded versions of drugs to generic versions of drugs, which cost a fraction of the price. And so we've had down drugstore sales for some time.

And now over the last three months we've clearly seen an acceleration in trend. I think we've finally gotten some of the major drugs--the conversion of generic is finished. We had a flu season that was little stronger that helped the drugstores, especially in December, and that started to even burn off on the month-to-month [number] a little bit. But still that's been a really hard-hit category that may suddenly start to look better.

Stipp: The housing market has been a bright spot in the economy. Are we seeing that in some of the retail numbers, housing-related retailers?

Johnson: Well certainly the building-materials stores were unbelievably strong in this month's report. And again you've got to be a little careful with just one month's report, but even year over year the building-materials sector is looking like it's been growing quite a bit higher than the rest of the retail components.

Stipp: Is that a Home Depot, Lowe's kind of store in there.

Johnson: Yes, that’s primarily what's in there, actually, yes.

Stipp: And furniture, doing better?

Johnson: Yes, that’s a hard one. Year over year furniture looks very good. One of the stronger categories. We've had a surprisingly couple of weak months, one flat and one down now this month for furniture. I don't know what's behind that. I mean we had a huge boom in December. Maybe it's just how the accounting flowed through or whatever. That’s why I take a three-month moving average and like to look a little better sometimes. But still it is one of the surprise ones that I'm going to keep my eye on. I don't exactly what’s happening on that one.

Stipp: But generally given what's happening in the housing market, you would expect these materials stores and the furniture stores continue to do well.

Johnson: Yes.

Stipp: Let's talk lastly about autos. So, autos had a strong month. Usually when you see autos having a strong month, people might not be spending as much on electronics or maybe on housing or other kinds of retail purchases. How [are auto sales] and how might they affect these other categories?

Johnson: Well, you know the number without autos was almost as strong as with autos. So, it's been a positive factor, and I don't know where the consumers exactly have found the money. But certainly they did buy autos and they did spend in other places this month, and on gasoline on top it. So, the consumers seem to have some real desire to spend and maybe the wherewithal, too, looking at some of our income data. But it's highly unusual to have such a strong auto month and have regular retail be so good because there seems to be a real substitution. If you are shopping for a car or laying out the money for the down payment, you don't have the money to do as many other things. And maybe it hurt the restaurants a little bit, I suppose, but that's about all I could see.

Stipp: So, the bottom line is some higher costs at the gasoline pump and some higher taxes haven't sunk the consumer so far, at least, from what we can tell.

Johnson: I'll tell you that the consumer seems resilient right now. And now it looks like in February they had another issue, which was they didn't get their tax refunds from a major tax company because of an error, so that kind of even compounded the problem further.

Stipp: All right, Bob, so very interesting trends when you dig beneath the surface on the retail sales data. Thanks for joining me again today.

Johnson: Great to be here.

Stipp: From Morningstar, I'm Jason Stipp. Thanks for watching.

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