Don’t Discount the American Shopper

On Thursday morning, retailers reported better than expected monthly sales data as shoppers returned in force. Clearly these results were cast against extremely weak sales data from a year ago, but the expectations had already baked in an improvement from these low levels. A year ago, the US economy looked fragile and on the edge of depression and consumer spent 5% less at these retailers. So, overall sales would need to increase by about 5.25% from a year ago just to get back to even, and analysts were anticipating a little better than that with 6.3% being the consensus. The actual results far exceeded expectations though coming in 9.1% better than a year ago.

Among the 20 retailers we cover that posted results this morning, 18 of them came in better than expected. An early Easter in combination with warmer weather and rising consumer confidence all helped bring in double digit sales increases at Target (TGT), Macy’s (M), Nordstrom (JWM), The Gap (GPS), Costco (COST), and even a few more.

After the Fed’s most recent report showing a major contraction in consumer credit availability last month, some had feared that the revival of the consumer was already in trouble. However, results out of most retailers were overwhelmingly positive, as they posted their 4th consecutive monthly gains. While we are pleased to see the positive results from retailers, one must wonder how sustainable are sales gains in an environment with credit contracting and still 1 in 6 Americans either unemployed or underemployed. Comparisons will become more difficult to beat later in the year as consumers started to emerge from the crisis mentality and frugality in the second half of 2009.

March was expected to be good, but these results were better than that. At Ockham, we are fairly neutral towards the retail sector overall as stock prices have already taken off in advance of the better sales data, as seen in the retail sector ETF (XRT) which has advanced 18.3% year to date, more than three times faster than the S&P 500 index. One of our favorite stocks in retail is Kohl’s (KSS), which posted one of the best monthly advances in March. Kohl’s grew sales by 22.5% and raised first quarter earnings per share guidance to $.55 to $.57, which compares favorably to the consensus analysts’ estimates of $.54. With that said, the company sounded a cautious tone for April sales as they forecast a low double-digit decline for this month. The stock fell slightly in spite of the great performance last month and the positive revision to guidance. With the stock trading just below the low levels of historical price-to-cash earnings and price-to-sales ranges, we continue to believe the stock is Undervalued.

When April sales results are posted, comparing the combined March and April sales this year to last will give a more accurate picture of where the consumer stands as it will neutralize the affect of Easter. For now, we are content to see March was far better than expected, and that should ease some fears about the resilience of the consumer in the face of a still difficult environment.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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