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Despite overwhelmingly underwhelming sales reports earlier this month, and even as consumer confidence bounces around, and even as long-term unemployment steadily rises, overall retail sales somehow managed to be good. It makes me wish there was a bit of punctuation that was both a period and a question mark. Sales excluding autos and gas rose 0.4% in February, which beat analyst expectations, according to Bloomberg. That increase came on the back of a small increase in January and is being heralded as showing the "underlying strength " in the economy.
Not surprisingly, investors are yet to be impressed. After more than a week of rallying, it seems that it takes more than a slightly positive outlook to get retail stocks to budge. Gap (NYSE: GPS ) , Target (NYSE: TGT ) , and Michael Kors (NYSE: KORS ) were all just ahead on the day, while Limited Brands (NYSE: LB ) and Williams-Sonoma were down.
The befuddlement of the market poses the question, "Do macroeconomic trends mean anything anymore?"
The confusion of the market
Often, these sorts of reports will move one end of the retail stock market, pushing luxury goods or apparel up, for instance. That's not the case today, as the contrast between Kors and Williams-Sonoma, or Gap and Limited Brands, highlights. Today, everyone is just out there trading as if nothing new has happened. In a sense, that's what's driving the confusion in the market -- nothing new has happened. February sales figures are in the past, and most companies have already reported on those sales if they're going to.
Gap and Limited Brands both had 3% increases in comparable sales in February, with both brands continuing strong runs. The new retail report won't change those already reported outcomes, nor will it affect the softness in consumer sales in China that dragged down Kors earlier this week. But that doesn't mean that investors should completely ignore these reports, as they provide an insight into future growth.
What's coming up next?
February's report included a revised forecast for U.S. spending over the next quarter, and suggested that it was going to be stronger than anticipated. That growth is going to be driven by an increase in inventories that analysts expect will fuel sales. The dramatic increase -- the largest since 1995 -- is certainly evidence of optimism from businesses, though it remains to be seen if that optimism is justified.
One of the things investors need to watch out for is that this growth comes at a time when it probably shouldn't. Payroll taxes and gas prices have risen over the past few months, and as a JPMorgan Chase analyst said, "[The consumer seems] to be shrugging off the massive drag to income from higher tax bills and has continued spending as though nothing's changed." He thought that was good news, but I'm not so sure.
The worry I have is that companies at the higher end are benefiting from consumers who are spending money that they don't have. That's going to mean that when the bill catches up, everything is going to slow down again. It's like a rubber band -- you can pull it out and get some distance, but eventually it's going to snap back. It would be silly to call it a bubble, but lending is on its way up -- last quarter's increase was the biggest in four years. That's good if it stimulates the economy, but it's not good if it means people are just buying things they can't really afford.
The bottom line
The February sales report should be cause for cautious optimism. Sales at specific retailers are more important to investors than sales across the board. The increase in lending may end up being a great thing for retail investors, and I think it's probably going to be very good news for broad sellers like Target. Those companies saw a 0.5% increase in February, which put them ahead of the curve. If that trend continues, it may lead to an interesting situation for high-end retailers, who will be fighting for consumers' cash. I'll be watching Target and Kors very closely over the next quarter.
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