So far, even without strong job growth and with continued weakness in housing, consumers continue to spend, which is helping to drive the economic renewal, albeit sluggishly. This is positive and clearly encouraging once the jobs and housing areas improve. The Fed realizes this.
The headline Retail Sales reading for May fell 0.2%, above the estimate of negative 0.7%, but was lower than the downward revised 0.3% in April.
Excluding the auto portion, Retail Sales increased a slightly better than expected 0.3%, albeit it was lower than the downward revised 0.5% in May.
On the plus side, consumers are spending, but the lack of consistency is troublesome. And given that gasoline prices are high, it reduces the disposable income consumers have to spend on goods and services. You probably won’t buy that DVD player you had been eyeing. This may not sound like a big deal, but think about it this way. Not buying that DVD player has a trickle-down effect as far as spending and negatively impacts total spending.
But this is not to say you should avoid retail. The key for success is selective picking.
My investment advice and best stock advice to you would be to stick with the leading discount bellwether retail stocks.
In the large-cap area, examples of these include Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).
Costco reported a 13% jump in its key same-store sales reading in May, above the 11.2% estimate polled by Thomson Reuters. Net sales for May surged 17% year-over-year. The results are consistent and continue to show steady growth; but, for that extra bit of growth, you should look at the smaller discount retail companies.
Costco, for instance, has a market cap of $35.02 billion and is estimated to report sales growth of 12.5% and 7.9% for the FY11 and FY12, respectively.
For comparison, take a look at small-cap PriceSmart, Inc. (NASDAQ/PSMT), an operator of 28 warehouse clubs in 11 countries in Central America and the Caribbean. PriceSmart reported a booming 19.0% increase in its same-store sales in May, along with an 18.7% year-over-year rise in May net sales. The reading was the 19th straight monthly increase. These numbers are well above the growth metrics for Costco. Consider the comparative sales growth for PriceSmart, which is 16.80% and 7.90%, for the FY11 and FY12, respectively. The growth estimates are probably conservative and could really take off if the expansion continues.
Another interesting discounter is large-cap Dollar General Corporation (NYSE/DG), which operates a staggering 9,300 stores across 35 states. Dollar has reasonable valuation and above-average price appreciation potential for investors.
And when housing picks up, I expect spending to continue to increase, especially on non-essential goods and services reflected by Durable Goods.
It does appear that a reversal is occurring in retailing. The key is to look for same-store sales growth in retailers that sell non-essential goods. Increases here could mean that consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items. For a contrarian pick in electronics, take a look at Best Buy Co., Inc. (NYSE/BBY), which has rallied since reporting weak Q1 results.
My favorite in the retail space continues to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product lines. This will offer consumers a one-stop place for shopping and make more money for these companies.