Orlando's Outlook: Retail sales bounce despite dinosaur department stores

05-12-2017

Bottom line April retail sales rose 0.4%, the best month-over-month (m/m) growth since January, although it was a smaller-than-expected rebound from softer March and February results. Those two prior months were revised higher, however, as consumers recovered from the delayed tax refunds, winter storm Stella and the late Easter and Passover holidays that plagued first-quarter results.

The bigger story, in our mind, is the significant mix shift that continues to evolve as April results boasted strong performance from the online, building-materials and auto categories, while general merchandise and apparel were both negative m/m. Consumers continue to shun brick & mortar for the ease and convenience of online. And they still prefer experiences over stuff, unless they’re fixing up their homes. So while all of this makes for a challenging brew for the retail industry, we continue to believe that consumers are confident and will continue to spend, perhaps just differently than they have in the past.

What’s up with ‘Mapril?’ Because school holidays, spring breaks, family gatherings and vacation travel typically revolve around the holiday calendar during March and April that changes year-to-year, we analyze the combined retail-sales results of both months—“Mapril”—to get a more accurate reading on the spring Easter/Passover shopping season.

Easter and Passover shifts create a 2-month retail sales season Due to the lunar and religious calendars, Passover and Easter change from year-to-year. On the Gregorian calendar, Easter Sunday can occur anywhere between March 22 and April 25, while the Jewish Passover occurs on the first full moon after the vernal equinox. So this year, Easter Sunday occurred relatively late on April 16, compared with an early March 27 last year. The first night of Passover was Monday, April 10 this year, but it was much later on Friday night, April 22 in 2016. So to account for the variable dates of these two religious holidays—and the secular spending associated with them—we’ll combine the spending for both months and compare that aggregate total year-over-year.

‘Mapril’ much stronger in 2017 The Department of Commerce reported this morning that average total retail and food-service sales of $470.5 billion for the 2-month holiday period of March and April 2017 rose a healthy 4.6% on a year-over-year (y/y) basis, the best “Mapril” in five years (5.6% in 2012). This year’s increase was nearly double the 2.4% y/y gains in both 2016 and 2015, and roughly even with 2014’s 4.5% increase. What’s interesting is that retail sales for Christmas 2016 (the combined sales of November and December 2016 and January 2017) also enjoyed a 5-year high, suggesting that the consumer has maintained a level of consistency.

Consumer confidence remains strong The pre- and post-election splits in consumer confidence are quite sharp. Since the presidential election in November, consumer confidence has surged, which we believe has helped to boost spending during the Christmas and Easter periods to 5-year highs:

  • Leading Economic Indicator (LEI) rose 0.4% in March 2017 m/m to 126.7, an all-time cycle high (dating back 58 years), besting the previous cycle peak of 125.9 in March 2006.
  • Conference Board’s Consumer Confidence Index soared to a 16-year high of a revised 124.9 in March 2017, up from a 3-month low of 100.8 in October 2016. It slipped to 120.3 in April.
  • Michigan Consumer Sentiment Index rose to a 12-year high of 98.5 with its final January 2017 reading, up from a 2-year low of 87.2 in October. May’s preliminary reading of 97.7 is a 4-month high.
  • NAHB’s housing market builder-confidence index (HMI) leapt to a near 12-year high of 71 in March, up sharply from 59 in August, although it declined to 68 in April.
  • The National Federation of Independent Business (NFIB) small-business optimism index rose to 105.9 in January 2017 (a 12-year high), up sharply from a cycle trough of 94.1 in September 2016. It has since eased to 104.5 in April.

Plenty of dry powder to spend The personal savings rate stood at a 7-month high of 5.9% in March 2017, its highest level since August 2016’s 6%. So with personal income growing steadily over the past several months due to a solid labor market, but with personal spending unchanged during February and March, consumers had put aside a stash of dry powder to increase their April spending levels, as the personal savings rate expanded from 5.2% in December 2016.

Consumer not dead, but shopping very differently The Wall Street Journal reported this morning that in 2016 annual department store sales were $7.3 billion lower than they were in 2000. But online retail sales last year have soared by $35 billion since 2000. If anything, those trends are accelerating. Looking at this morning’s Commerce data, our research friends at RDQ Economics report that online retail sales over February, March and April combined have risen at an annualized rate of 14.1%. But general merchandise and apparel sales have both fallen on the same basis 5.8% and 5.2%, respectively. Little wonder, then, that brick & mortar stores like Macy’s are struggling, while online ones such as Amazon are soaring.

Renewed energy dividend in 2017? Crude oil (WTI) prices fell more than 20% this year, from $55 per 42-gallon barrel in early January to $44 last week. Gas prices have much been stickier, however, as the lagging national average price of a gallon of unleaded regular gasoline fell less than 4% over the past month, from $2.42 last month to only $2.34 this week.

Here’s the detail on the weaker-than-expected April retail-sales results and the positive revisions to both February and March:

  • Nominal retail sales solid Headline retail sales for April rose 0.4%, which is solid, yet weaker than the 0.6% gain that had been expected. But March was revised up from a 0.2% m/m decline to a 0.1% increase, while February was revised up a tick to a final decline of 0.2%.
  • Ex-auto sales positive April’s core retail sales—which strip out volatile auto results—were similarly solid but weaker than expected, as auto dollar sales rose 0.7% last month, much better than declines of 0.5% and 1.5%, respectively, in March and February. So retail sales ex-autos in April rose a weaker-than-expected 0.3%, compared with expectations for a 0.5% gain. March was revised up from breakeven to a gain of 0.3%, and February was revised up a tick to a final gain of 0.1%. According to the Commerce, total auto unit sales in April rose 1.7% m/m to 16.81 million annualized units. That’s much better than March’s poor showing, when auto sales unexpectedly plunged 5.4% to 16.53 million annualized units. In sharp contrast, auto sales peaked at 18.3 million units in December. 
  • Ex-autos & gas tepid Adjusted core retail sales—which strip out the results from both gasoline and auto sales—rose a weaker-than-expected 0.3% in April, a tick lighter than expectations. March was revised up strongly to a gain of 0.4% from a preliminary gain of 0.1%, and February was unrevised at a final gain of 0.1%. Unleaded gasoline prices rose 2.8% during April to $2.39 per gallon nationally, and gasoline dollar sales rose 0.2% last month.
  • ‘Control group’ limp in April Finally, so-called “control” results—which strip out autos, gasoline, building materials and food service, and feed directly into Commerce’s quarterly GDP calculation—rose in April by a weaker-than-expected gain of 0.2%, half the level that had been expected. March was revised up from a preliminary gain of 0.5% to a much healthier increase of 0.7%, while February was unrevised with a final decline of 0.2%. Because consumer spending accounts for about 70% of GDP, this strong “control group” revision in March will likely contribute to a positive revision for weak first-quarter GDP from its 0.7% flash to perhaps 1% or more. The positive April reading, with a higher base from the strong March revision, may pressure second-quarter GDP above our 2.6% estimate here at Federated.