9/8/2010
By Brian Sozzi, Research Analyst

In her chart-topping single (reached #8 on the Billboard music charts) "Where have all the Cowboys Gone", Paula Cole professed:

"Where is my John Wayne
Where is my prairie son
Where is my happy ending
Where have all the cowboys gone"

I remember lacking an affinity for this song as a somewhat portly 15 year old, and as I pen this short note as a physically fit 28 year old, I can say confidently I am still far from a fan of the tune.  As painful as this is to voice, I must borrow the title as the lead into my consumer-related musings today.  So, I ask, where have all the U.S. consumers gone?  Now, much tends to be made of monthly same-store sales data, which may best or fall horribly short of consensus as a result of low-ball estimates, calendar vagaries, or Mother Nature's mood.  The volatility from month to month is one reason why I continue to believe retailers would be better serving their shareholders by refraining from reporting the data.  That's a discussion for a different day, however.

The market recently laid eyes on stronger than expected August same-store sales, igniting in my view a slow burning debate that says inventories were cleared enough in August to suggest 2H10 gross margins will avert disaster scenarios put out there on the 2Q10 earnings calls (for more on this topic see my article: "Are there Any Reasons to Sniff Around Unloved Retail Stocks" at www.wstreet.com).  The budding optimism has lit a momentary fire to the S&P Retail Index (RLX).  All of that said, the macro-related data on the consumer continues to paint a sobering story.  Using July 2008 as a starting point (before things became very dicey in the global financial markets) incomes have appreciated 5.2%.  Not robust by any measure, but reasonable considering the Great Recession has kept a lid on inflationary forces.  Where has this income went?  It has went to household balance sheet de-leveraging and to savings accounts, certainly not the retail sector. 

The savings rate from July 2008 to August 2010 has risen 200 bps, while retail sales ex. auto have fallen 3.23%.  Consumers not only have had to deal with much lower home values and fears of the unknown, but also with the fact the S&P 500, for example, is down 13% from July 2008 to present day.  Net wealth has recovered to some extent with the rise in equities and home prices from the middle of 2009, but the consumer is cognizant that their spending ways of 2005-2007 are through for the time being.  In the immediate future, those in the U.S. may very well see higher income tax rates, higher taxes on capital gains, and higher medical expenditures, which explain why money is being socked away instead of being dispensed at malls and discounters.  Remember, there is a reason retailers are continuing to shutter stores two years after the disastrous holiday season of 2008.

Until a modicum of certainty can return on the U.S. economy, therefore triggering a drawdown in savings or the spending of higher paychecks (driven by longer workweeks and higher hourly wages), I suspect the road to peak operating margins (hit in 2007 for most) for retailers will be a sluggish hike.  In this type of backdrop, we are focused on companies that have an international growth angle that allows for the attainment of stronger prices and square footage growth.  Moreover, a retailer's U.S. operations must have the infrastructure in place to maintain lean, optimized inventories, and a concept that is not yesterday's news.

Brian Sozzi
Wall Street Strategies