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Investing Specialists

Retail Stocks Shellacked Even as Consumers Open Their Wallets

Friday's retail sales report dispelled any notion that the consumer is afraid to spend, writes Morningstar's Bob Johnson.

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It was a relatively quiet week for world markets as the major equity markets generally dropped between 0.5% and 1.5%. A lot of the weakness was company-specific, with U.S. retailers getting pounded as company after company reported terrible results with little optimism for much improvement. Lower inventory data generally kept oil and commodities prices moving higher, with general commodity indexes up about 2.5%. Bonds tracked even lower with the U.S. 10-Year Treasury yield now down to just 1.71%, off another 0.07% from last week as a result of poor retailer data and a surprisingly high unemployment claims figure (that may have been retail-related).

By Thursday, even we were growing increasingly worried about the U.S. economy with the combination of a softer employment report last week, a higher initial unemployment claims report, and an unending stream of disappointing first-quarter retailer earnings reports. A broad package of multiline retailer stocks was down more than 7.5% in a single week—and that included a few ringers like several of the dollar stores. However, the April retail sales report on Friday dispelled any notion of a consumer that was afraid to spend. Headline, month-to-month growth was 1.3%, well above the consensus of 0.8%. Much of the increased spending was in more discretionary categories. It became clear that retailer problems were not because of consumer lethargy, but because of shifting spending interests and massive channel shifting to online venues. The report was a game-changer and solved a lot of mysteries concerning apparently high consumer incomes and increasingly worried retailers. Unfortunately, poor retailer reports will still keep strong pressure on retail employment for months. New hiring at Amazon AMZN-related entities won't offset all those losses. And retailers probably have to play catch-up with layoffs as now there is no denying that weather was not the root problem at brick-and-mortar retailers.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.