The Consumer Confidence Conundrum

Some companies are thriving even though consumers are less certain about their economic futures. The contradiction between data surveys and recent earnings reports suggests that all might not be lost when it comes to investing in retailers.

Sometimes sex sells
For example, an interesting economic statistic that was recently reported was a 17% increase in June same-store sales at the Victoria's Secret chain owned by Limited Brands (NYSE: LTD  ) . Could discounts explain these results?  Victoria's Secret isn't known for attracting budget-conscious consumers, so my hunch is to say, not really? Rick's Cabaret International (Nasdaq: RICK  ) , a publicly traded strip club operator, today reported that third-quarter revenue rose 15.2% and there was a 9% increase in same-store sales. However, apparently sex isn't the only thing that's selling.

A bit more to the story
Indeed, June retail sales were better than expected for chains ranging from Target (NYSE: TGT  ) to Kohl's (NYSE: KSS  ) . People are also increasingly taking a shine to the Big Three automakers, which reported double-digit June sales, and to Hyundai Motor, whose Elantra vehicles posted a 40% increase.  

Other winners include Dunkin' Donuts, which reported 45 straight quarters of comparable store sales growth until the first quarter of 2008. Dunkin' Brands Group, which plans to raise as much as $401 million in selling shares to the public, was able to weather the recession surprisingly well. "Positive comparable store sales growth has continued in the first quarter of fiscal 2011 despite adverse weather conditions in the Northeast region during the quarter," according to the company's S-1 filing with the SEC.

More bling to the story
Rich people are continuing to spend as well. Tiffany & Co. (NYSE: TIF  ) and Coach (NYSE: COH  ) both posted stronger-than-expected earnings last quarter and have seen their shares soar by 30% and 21%, respectively. Sales of modern art continue to set records at auction houses around the world.

Could some of these retailers' increases be due to lower gas prices and a rising stock market? Possibly, but there seems to be more to the story.

Consumers are harder than ever to figure out, and it's easy to understand why.  They have been through the worst economic downturn since the Great Depression and are eager to avoid making the same mistakes that got them into trouble. Many are deleveraging -- reducing their debt levels -- and are trying to live within their means. That explains why credit scores are at their highest levels since 2006 and consumer credit rose for the eighth straight month in May.  That's great news for people who can afford to buy a home.

However, last month's increase of 18,000 jobs was anemic and was nowhere near where the U.S. needs to be in order to significantly reduce the unemployment rate.  Consumer sentiment is gloomy. The widely followed Thomson Reuters/University of Michigan survey dropped to 71.5 at the end of June from 74.3 in May. According to MarketWatch, the survey of business conditions and how consumers view their personal finances averaged 87 before the recession hit. Meanwhile, the Conference Board Measure of CEO Confidence retreated sharply in June and the index fell to -45.5 for the period ending July 3, from -43.9 the prior week.

All is not lost!
Warren Buffett, though, is not panicking.  The Oracle of Omaha, in fact, told Bloomberg TV that he would "bet heavily against" a second recession happening.  He is a realist, arguing that it will take a few years for the jobless rate to improve.

If Uncle Warren isn't panicking, maybe you shouldn't either. Of course, if Congress and President Barack Obama fail to reach a deal on the debt ceiling, then almost all bets are off.

Jonathan Berr owns no shares of the securities listed here. The Motley Fool owns shares of Coach and Limited Brands. Motley Fool newsletter services have recommended buying shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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