3/12/2010
By Brian Sozzi, Research Analyst

Was the February retail sales numbers that unexpected in light of the chain-store sales data last week, ICSC/Goldman weekly data, and what we are hearing on the 4Q conference calls from major retailers?  In our opinion the data is not unexpected, reflecting a few trends we have communicated frequently.  They include:

* Modest return of the household wealth effect (recently released 4Q data on household net wealth declined from the 3Q pace, but still increased strongly year to year)
* Improved sales trends in hard hit housing areas such as California, Florida, and Arizona.  We believe this is indicative of (1) those people who rode out the housing downturn now seeing prices having rebounded from the trough; (2) first-time homeowners filling out their homes with furniture and clothes, for example (more space as they trade up from renting); (3) individuals trading up in terms of housing size to get out from underwater mortgages and being able to buy more home given the decline in prices.
* Improved jobs situation for those in manufacturing and temporary work; more people working, more consumption that is not only resigned to everyday necessities.

Don't get us wrong, the economic environment remains challenging.  There are structural changes continuing in the labor force, such as the former machine operator now waiting tables or that former autoworker having to mow lawns as a side job while collecting unemployment checks.  But, it's worth acknowledging the improvement unfolding within household consumption.  That said, we wonder if the turnaround continues deep into 2010 in plain view of the recent hiccup in U.S. consumer confidence and housing prices.  What we may be encountering at the moment is the release of pent up demand from less dire economic conditions and consumer mindsets following the 3Q inflection point in the economy.  This also could be coined a lag effect.

February retail sales on the headline increased 0.3% (consensus: -0.2%).  Ex auto retail sales advanced 0.8% (consensus: +0.1%).  Remember, this is all in spite of the unfriendly weather throughout February.  The core measure of retail sales we track increased 0.9%, accelerating from the January gain of 0.6% which was downwardly revised by 0.1%.  Positive areas of the report included furniture (+0.6%), electronics (+3.67%), building materials (+0.4%), grocery (+1.33%), clothing (+0.5%), sporting goods (+1.6%), general merchandise (+1.02%), department stores (+1.14%), misc. (+2.45%), and food service (+0.9%).

Brian Sozzi
Wall Street Strategies