The Real Problem With Retailers

Ignore the noise, here's the real problem with retailers.

Wade Michels
Wade Michels
Jul 23, 2014 at 1:26PM
Consumer Goods

Newsflash! Retailers are struggling. How much? While the S&P is near an all-time high, the SPDR S&P Retail ETF (NYSEMKT:XRT), which measures the performance of companies like Wal-Mart (NYSE:WMT) and The Container Store (NYSE:TCS), has underperformed the market by almost 14% over the last year. Granted, some are doing better than others, but as a group retailers have been stinking up the joint.

Source: YCharts.

So what's the problem? Has Wal-Mart forgotten how to do business all of a sudden? Has The Container Store's concept gone stale already? The answer doesn't have anything to do with the quality of these companies' operations. Simply put, the average consumer's income is weak. And unfortunately, it may stay that way for awhile.

The real reason
Stephanie Pomboy from MacroMavens said, "The problem is that spending is only as good as income growth." According to Barron's, in May, consumer income was up 0.4%, 3.5% for the year, and only 1.9% once you account for inflation. These are pretty sickly results.

During the financial crisis, companies needed to cut expenses. As a group, they achieved this by laying people off. As business improved, companies found that they didn't need to replace the positions they cut. At least, not with full-time jobs.

Stephanie Pomboy reported that in June, another 523,000 full-time jobs were wiped out. That means that full-time employment is now 3.4 million less than it was before stuff hit the fan five years ago.

The positive mojo in the jobs reports is real, but it's happening because companies are willing to offer part-time work and desperate employees are willing to accept part-time pay. Now you have great spenders running around with less money. That hurts retailers more than others because that is where consumers spend most of their loot.

So when you take all that into consideration, it's not a wonder that companies like Wal-Mart are struggling. Wal-Mart U.S. CEO Bill Simon recently told Reuters, "It's really hard to see in our business... that it's gotten any better." Kip Tindell, the highly respected CEO of The Container Store, who is known for conscious capitalism, said, "Now we've come to realize it's more than just weather and the calendar." 

Source: YCharts.

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What comes next
I think retailers and consumers will have to eventually adjust their expectations. After all, it is possible to spend less, especially if you're not raking in the bucks. In turn, weak same-store-sales numbers, like the recent negative 0.2% from Wal-Mart and the 0.8% decline from The Container Store, may become the norm rather than the exception.

And that's OK, as Wal-Mart is still on pace to do almost $500 billion in sales this year while The Container Store should come close to the $1 billion mark. So what's wrong with that? Why do companies have to grow endlessly? Why do profits need to go to the moon? When is enough, enough?

Foolish final words
Ultimately, I think things will settle, expectations will change, and a new normal will emerge for retailers. Analysts will start forecasting more reasonable numbers, companies will settle in, and consumers will figure things out. These cycles are not new, they've happened plenty of times in the past, and they're likely to happen more often in the future. 

The important thing to remember is that retailers will only be as strong as the consumers who shop at them. Sure, the better operators may pick up share, but you can't squeeze blood from a stone. When the consumer strengthens, a rising tide will lift all of the boats. 

In my opinion, in regard to part-time jobs, full-time employment, and retail strength, all of this stuff will ebb and flow. Good times and bad times will happen. But folks need to keep on working in some way, shape, or form, and that's the key. As long as the consumer is earning something, retailers will stay afloat.