Last week’s report from the US Census Bureau on retail sales for May showed a drop of about 1.2% from April sales. It was the first drop in retail sales since September 2009, a winning streak longer than any in the past 10 years. Suspected retail weakness may have gotten its first piece of empirical evidence this morning as Best Buy Inc. (NYSE: BBY) reported earnings for its first fiscal quarter of 2011 that were well below analysts’ average estimates of $0.50 EPS on revenues of $10.9 billion. Best Buy reported EPS of $0.36 on sales of $10.8 billion.
Calling Best Buy a bellwether in retail stocks may be a bit of a stretch, but retail sales were off at about a third of stores that published May sales figures earlier this month. Abercrombie & Fitch Co. (NYSE: ANF), J.C. Penney Co. Inc. (NYSE: JCP), and Rite Aid Corp. (NYSE: RAD) all reported lower sales in May.
A recent Gallup poll noted that households with income above $90,000/year have increased spending, while middle and lower income households have not moved at all. And there are far more middle and lower income households in the US than there are high-income households.
Consumer spending, as everyone knows by now, generates about two-thirds of US GDP. Continued high unemployment, stagnant wages, and restricted access to credit have kept that spending at fairly low levels since late 2008.
Before consumer spending will truly pick up, something has to give. Unemployment is the least likely to change quickly for the better. Wages won’t rise much because there are too many unemployed. That leaves access to credit, and consumers are reluctant to go down that path again because they fear for their continued employment and their ability to get a wage hike. It’s at least a nasty circle, if not a vicious one.
Best Buy shares are off about 6% on heavy volume in the first half-hour of trading this morning. Other retail stocks are trading ever so slightly up, but all signs point to that as a temporary phenomenon.
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