3/21/2011
By Brian Sozzi, Research Analyst

The risk on trade within the consumer discretionary sector has been silenced in one month's time.  There are obvious pockets of underperformance from the 95 total company screen I used in fleshing out the data below.  The fabric that binds most of the lagging stocks is a heavy exposure to cotton as an input cost (such as in teen apparel) and a subsequent unknown as to the consumer response to ticket price increases north of 15% in the second half of 2011.  Another theme from the data set is the relative underperformance of companies whose business models are predicated on the consumption patterns of upper-income earners.  Stocks that I would classify as luxury goods plays have underperformed the S&P 500 index by almost three times in the past month (despite some of these companies partaking in emerging market growth) as a break in the upward trend in equities markets has called into question the forward propensity of this group to spend. 

Conversely, three sectors that have outperformed are mid-tier department stores, off-price retailers, and dollar stores, for slightly varying reasons.  The core principle I suppose between these three sectors is that when faced with tougher choices on discretionary goods in light of price increases, consumers will trade down, leading to greater unit sales of inflationary products (note these sectors offer relative value to the consumer when inflation hits).  In doing so, it has positive implications for the operating expense leverage of the sector.  Also, consumers to the trade down arena tend to be influenced more by cash in hand (see impact from stimulus and returning jobs) than stock portfolios.  That said, the move in dollar store stocks, while in part to the trade down theory, has an added component of private equity activity (NDN, FDO) intensifying.

95 companies in total sample size
One-month time horizon for 95 companies
One-month performance of S&P 500: -4.54%
One-month performance of S&P Retail Index: -5.89%

Some Findings:
* Gain in share price: 15.8% of sample size
* Outperformed S&P 500: 27% of sample size
* Outperformed S&P Retail Index: 45% of sample size
* Underperformed both indexes: 53.6% of sample size
* 10% plus share price decliners: 35% of sample size
* Dollar stores (NDN, FDO, DLTR, DG): average share price gain of 4.76%
* Off-price retailers (TJX, ROST): average share price decline of 3.45% (relative outperformers)
* Mid-tier departments stores (KSS, JCP, M): average share price decline of 1.85% (relative outperformers)
* Luxury laggards (JWN, RL, SKS, COH, MOV, TIF): average share price decline of 10.07%
* Teen apparel decimated (URBN, ARO, ZQK, LTD, GES, BEBE, PSUN, BKE, HOTT, WTSLA, EXPR, VLCM): average share price decline of 12.2%

Brian Sozzi
Wall Street Strategies

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