The U.S. Census Bureau recently released disappointing statistics for the all-important 2018 holiday shopping season -- at least according to some media outlets. Retail sales unexpectedly fell 1.2% in December, in sharp contrast to economists' consensus expectation of a 0.2% rise. The Census Bureau also reduced its estimate of November retail sales growth to 0.1% from 0.2% previously.
Since consumer spending makes up roughly 70% of U.S. GDP (the total value of economic activity), retail sales are a closely-watched indicator for the overall health of the economy and for specific companies. Nevertheless, the headlines surrounding this metric are often misleading -- and that was the case for the December 2018 report.
Some very important context
Many news outlets reported the 1.2% decline without providing much additional color. The important detail here is that seasonally-adjusted retail sales fell 1.2% in December compared with the November figure. Month-to-month sales are highly volatile and aren't good indicators of trends. That's especially true around the holidays, as the ultra-busy Black Friday through Cyber Monday period falls within November.
The more important figure that was mostly overlooked was the year-over-year change in retail spending. Despite the month-to-month tumble, sales were actually up 2.3% compared to December 2017. Total sales for the whole 2018 holiday shopping season (October through December) increased 3.7% year over year.
Image source: Getty Images.
In other words, it was hardly a disastrous report. It is worth noting, though, that the 3.7% year-over-year gain for the fourth quarter represented a slowdown relative to the first nine months of 2018. For the full year, total retail sales increased 5% over 2017 and rose 4.6% excluding auto and gasoline sales. That's a huge annualized gain: one of the biggest in recent years. It remains to be seen if the Q4 slowdown will persist or not, although it would be a healthy move for consumers to take a breather after a year of spend-happy activity.
It's also important to note that the retail sales report is a lagging economic indicator. Basically, shoppers' behavior reflects a lot about things that have already happened, making the numbers far less important to investors than forward indicators like inventory levels or company-specific forecasts. Plus, even though the overall results were solid, a deeper dive into the U.S. Census Bureau's scorecard shows that the holiday season wasn't cheery for everyone.
The retail revolution continues
Online retail, led by Amazon (AMZN +1.93%) -- as well as the tech-enhanced duo of Walmart (WMT 0.42%) and Target (TGT 0.23%) -- made the biggest gains once again in 2018.
Restaurants also notched a good year, although that industry is notoriously cutthroat, and is still dealing with the fallout from a period of over-expansion. Landing at the bottom of the list -- with revenue declines -- were department stores and sporting goods stores.
|
Business Type |
Fourth-Quarter 2018 Year-Over-Year Revenue Change |
|---|---|
|
Nonstore retailer (online) |
8.4% |
|
Food and drink services (restaurants, bars, taprooms) |
5.3% |
|
Clothing and accessories |
4.7% |
|
General merchandise stores (big-box and department stores) |
3.1% |
|
Home improvement stores |
2.3% |
|
Electronics and appliance stores |
0.5% |
|
Department stores only |
(1.1%) |
|
Sporting goods, hobby, and book stores |
(11%) |
Data source: U.S. Census Bureau.
In a world that is steadily going more digital, online retailers are the way to go. However, it's worth noting that Amazon's online sales grew only 13% in the fourth quarter, a drop from its 20% growth rate during the holiday quarter of 2017. The case for investing in the e-commerce titan has changed over the years, though -- at this point, cloud computing and advertising services are quickly taking over as Amazon's growth drivers.
Check out the latest earnings call transcript for Amazon.
That leaves big-box stores like Walmart and Target, both of which have been growing their online sales at rates well into the double-digits. Neither has reported its fourth quarter results yet, but the U.S. Census Bureau's numbers bode well for them, as general merchandise and online retail operations both notched healthy annual gains.
Also of note are the results in merchandise-specific brick-and-mortar store segments. Electronics and appliance stores have lagged behind overall retail spending for years, as have sporting goods and other hobby stores. That doesn't bode well for the likes of Best Buy or Dick's Sporting Goods, the largest electronics and sporting goods chains, respectively.
Long story short, though U.S. retail sales fell in December compared with November, conditions were anything but bad. Month-over-month figures are volatile and don't on their own indicate trends. Year-over-year figures are more accurate, and those still indicate that the U.S. consumer is healthy and spending money. So there's no need for investors to panic -- even if a few headlines say you should!
