Using Consumer Spending As A Market Indicator

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Using various individual retail sales figures in December and January may be one of the best indicators available for how to predict the next five to nine months of retail economic activity. Read on to discover how retail groupings can be used as a market indicator.

Same Store Sales
Before getting into individual metrics, the single commonality that is defined among analysts and investors in the retail space is same store sales. This is simply a measure of the change in sales over a defined period - usually year over year - for all stores open for more than a year.

As with most stocks, earnings per share and revenues do matter and should be a point of focus, but it is just as vital to watch the important retail metric of same store sales. Retailers that produce strong and steady same store sales are often those that offer the best performance.

Important December/January Data Release
The holiday onslaught is not just confined to the shopping malls of America, but finds itself on Wall Street with the torrid release of same store sales data. It usually starts after the first week of December and continues through to late January, as retailers have differing release dates.

In the 1990s, before the advent of online shopping and gift cards, this time frame was late December to mid-January horizon, but online sales growth and the proliferation of Christmas gift cards has since widened out the holiday shopping season. (For related reading, see Capitalizing On Seasonal Effects.)

Retail chains have also standardized their release of same store sales within a few days of each other for consistency, which typically occurs on the first trading Wednesday evening and Thursday of January. After the release of this holiday sales data, the investment community usually tries to make its assumptions for the next four to nine months. The reason that analysts wait for one month's data to forecast six to nine months in the future is because the holiday season is the most critical quarter to retailers.

Gaining an Idea of the Overall Consensus and Outlook
For a forward fiscal year, retail analysts usually make their largest fiscal forecast estimate changes in mid-January to early February of each year right after most companies report earnings and all of the major holiday misses or surprises are apparent. Generally, they do not make any additional major changes until the summer, when the "back to school" effect can be seen. There are exceptions, such as a firm-specific changes or a major market event, but this pertains to the group as a whole.

Upon the release of Q4 earnings reports, which encompasses the holiday season, companies tend to offer their year-ahead guidance. Analysts will also shore up their previous forecasts and will often change their ratings on retailers, especially if large forecast changes need to be made. (For more insight, see Strategies For Quarterly Earnings Season, Surprising Earnings Results and Earnings Forecasts: A Primer.)

This helps to provide additional clarity in the projected strength of a company's sales looking forward, along with the overall retail climate. If several major retailers start to issue weak guidance, it is usually a sign of large-scale retail weakness and should be a warning sign to retail investors.

The Importance of Retail Grouping
There are a wide number of very different retailers in the market. To gain an overall understanding of the retail market along with distinguishing strength and weakness within retail segments it is wise to group similar retailers.

For broader-based retail chains, consistent leaders, such as Wal-Mart, Target and Costco Wholesale might be the key players to consider. Of course, the companies that top this list will vary and the list itself will change over time. While these are just a small segment of the wide retail sector, due to their size, the retail sales data of these companies are some of the most important to watch to be able to gauge spending health in the economy.

To gain an understanding of whether or not consumers are buying bigger ticket items, check out the consumer electronics, mainly brick-and-mortar companies like Best Buy, who sell big screen TVs. You can also look to online retailers, such as Amazon.com, to gauge the health of consumer internet spending.

To gauge how often people are going out for dinners, which is often a sign of consumer health, look to mega-chain restaurants like Brinker International and Darden Restaurants. However, chains such as McDonald's, Yum! Brands and other fast food or quasi-fast food chains should not be in the equation, because their products fall more into the range of consumer staples than discretionary goods.

The list can grow longer by the minute if you want to be very specific in your segmentation, but breaking down the retail space into just a few segments can still give you insight into how consumers are spending. The following chart provides an example of how your retail spreadsheet might look:

Retail Component December Guidance & January Reporting Guidance for Calendar Q1 Guidance for Calendar Q2 & more
Wal-Mart (WMT) - - -
Target (TGT) - - -
Costco (COST) - - -
Ralph Lauren (RL) - - -
VF Corp (VFC) - - -
Limited (LTD) - - -
Nike (NKE) - - -
Brinker (EAT) - - -
Darden (DRI) - - -
Kohl's (KSS) - - -
Federated (FD) - - -
JC Penney (JCP) - - -
Best Buy (BBY) - - -
Amazon.com (AMZN) - - -
UPS (UPS) - - -
Fedex (FDX) - - -
JB Hunt (JBHT) - - -
YRC Worldwide (YRCW) - - -
RailAmerica (RRA) - - -
Packaging Corp (PKG) - - -
Bemis (BMS) - - -

Which Retail Components Should You Ignore?
Not all retailers will shed light on the spending health of consumers, typically, these are the companies that sell life staples, which are purchased regardless of the economic conditions. Examples of these companies include basic-level food chains and drugstores.

Also, autos and other transportation-related sectors aren't a good gauge as U.S. auto manufacturing and sales since the '90s have been steadily less correlated to overall economic spending, partly because of foreign auto sales forging ahead into the U.S. and partly because of the perpetual woes of the Big Three and the incentives they use to lure new car buyers. As this has grown to be more and more of a problem each year, it is not likely that any sizable change would be expected there. (For related reading, check out the Industry Handbook.)




Housing product sellers like Home Depot and Lowe's also aren't the best indicator of consumer health because of the inherent ties to housing and the drastic swings that the housing sector tends to experience.

Why should investors care?
If the retail consumer's spending is going to slow down for three to six months, the rest of the economy has to operate on different assumptions. Housing is volatile, autos are volatile and durable goods are volatile, and the swings are often temporary, but systematic retail change can be longer-lasting.

What can alter these factors as an indicator?
A severe positive or negative global shock event can impact discretionary retail spending overnight. A drastic decision out of the Federal Reserve on its monetary policy or a rapid and unexpected interest rate cycle shift can change this scenario as well. Critical changes are rare, but when they unexpectedly occur, it changes the game.

Severe commodity or energy price changes can also drastically alter the cost structure of this scenario, although this is often well publicized. A severe bull market or severe bear market must also be taken into consideration.

Conclusion
General consumer discretionary spending and the related parts of retail are what define a good or bad economy, and catching this trend can be invaluable. Picking a year's high-flier or a severe laggard in each group does not usually help, because of overall index misrepresentation. Therefore, using the traditional, steady choices of stocks in each retail group can provide savvy investors with a wealth of information.

by Jon Ogg, (Contact Author | Biography)

Jon Ogg has been a financial news analyst since 1997. Some of his accomplishments include creating an audio squawk for active traders called TTN (it was sold in 2003 and became a news broadcast desk that became part E*Trade); working as a licensed bond broker to U.S. and E.U. financial institutions; acting as a financial advisor and portfolio manager in Copenhagen, Denmark; and gaining experience in private financings. He received a Bachelor of Business Administration in finance at University of Houston. Jon has lived in New York, Chicago, Copenhagen and Houston. To read more of his work, see his blog site www.247wallst.com.