What To Make Of A Messy First Quarter For US Retailers

U.S. retail sales numbers from the month of February looked pretty bad at first glance, but there may be reason for optimism in the retail space. Earlier this month, the government reported a 0.2-percent decline in February retail sales, but there are a handful of caveats to the low number.

Deep Dive

First, the disappointing February number followed surprisingly strong January sales growth of 0.7 percent. The revised January estimate is much more impressive that the 0.2-percent prior estimate.

January was the second best month for retail sales growth since last May.

The upward January revision was especially strong considering all the headwinds retailers dealt with to start the year, including a government shutdown, a shaky stock market and, perhaps most importantly, inclement weather.

Heading into the second quarter, all of those headwinds have been eliminated, and the most recent batch of consumer data is promising.

Unemployment remains low, hiring has been strong and wages are finally on the rise after years of stagnation. Fears over the potential for an S&P 500 earnings recession in the first two quarters are waning.

“Taking this all together, we look for a decent bounce back in March,” ING economist James Knightley recently wrote.

Consumer Trends

Knightley said one potential red flag to watch that is difficult to explain is a steep drop in food sales in February.

Food sales declined by 1.2 percent, their largest drop in about 10 years.

Bank of America Merrill Lynch analyst Robert Ohmes recently said the key U.S. consumer trends are still too mixed to be positive.

The low-income segment of the economy is the key segment for investors to watch, he said.

According to Bank of America credit card data, Americans earning less that $50,000 saw the largest year-over-year growth in spending in February. Disposable income in the month was up about 4 percent, Ohmes said.

In addition, earnings and unemployment numbers and reasonable inflation levels are all bullish signs. A slight downtick in consumer confidence levels in March and a mixed housing market are worth keeping an eye on, but Ohmes said investors have no reason to worry about either at the present time.

How To Play It

The SPDR S&P Retail XRT is off to a strong start to 2019, gaining 11.2 percent on the year. Ohmes said retail investors should focus mostly on the discount group, such as Walmart Inc WMT and Target Corporation TGT.

“We believe continued tailwinds for the low-income consumer should support spending growth at value-oriented retailers,” the analyst said. 

Bank of America has Buy ratings for both Walmart and Target, as well as BJs Wholesale Club Holdings Inc BJ, Dollar General Corp. DG and Dollar Tree, Inc. DLTR.

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