The Balance Sheet Future

Retail Spending Theraphy

Tomorrow is retail sales day and, after January's surprise 1.0% rise following December's 3.0% drop, can we expect the trend to continue?  Let's review some of the recent retail company reports across various price points:

Neiman Marcus

The U.S. luxury retailer, posted a second-quarter loss after cutting prices during the holiday shopping season and writing down its assets by $560.2 million.  “We expect retail demand and revenues will remain weak for an extended period,” the company said. Sales at stores open at least a year plunged 23 percent.

“Core” customers will return when the financial markets stabilize, he predicted. “Aspirational” clients have become more discerning, Chief Executive Burton Tansky said.

The retailer is canceling orders, returning goods to vendors and cutting more expenses, and it may push store openings back further, Tansky said today on a conference call with analysts.

The "core" luxury consumer continues to cut back spending as their portfolios, houses and bonuses decline.  With the high-end consumer spending selectively and the aspirational buyer done, what can we expect from the mid-range consumer?

Macy's

Macy's Inc. shares soared Friday morning after a Goldman Sachs analyst upgraded the stock Thursday, despite the retailer posting a bigger decline in same-store sales than Wall Street had anticipated.

While Macy's said in a statement Thursday that its February same-stores sales were consistent with its own expectations, many analysts were disappointed. Its sales fell 8.5 percent, while analysts predicted same-store sales would fall 7.3 percent, according to Thomson Reuters.

The company has also demonstrated that it will be able to pay its debts through next year, prepaying $686 million in debt, and should end the year with $600 million.

Macy's sales dropped 8.5% compared to a 23% fall at Neiman Marcus. Not bad comparatively and may be a sign of consumers still spending.  Macy's ability to pay off debt shows management is navigating their capital structure well and the stock responded, up more than 50% off its low.  However, same store sales were still down 8.5%, and with Unemployment Here to Stay, I think their customer will pull back further or seek better prices.

Walmart
Walmart U.S. had strong sales performance during the four-week February period. Comparable store sales increased 5.0 percent, driven largely by an acceleration of traffic. Average ticket also increased.

“Our customers have come to trust our ‘Save Money Live Better’ promise and we exceeded our own expectations for the period,” said Eduardo Castro-Wright, vice chairman, Wal-Mart Stores, Inc.

Grocery, health and wellness and entertainment drove the period's comparable sales performance. Home and hardlines also were positive.  At Sam's Club Furniture, jewelry and other large-ticket categories remained soft.

Walmart's 5.0% increase in same store sales tells the story of the U.S. Consumer: trading down in price point, continued spending on the necessities but pulling back on the larger ticket items and, as we saw above in Neiman Marcus, cutting luxury items altogether.  The years of spending instead of saving are over.  Furthermore, concerns about job security and declines in their home and investments mean consumers aren't likely to start buying up anytime soon.

The economic crisis provided shock therapy to the U.S. consumer.  Consumers learned that they do not need a new car every three years anymore than a new luxury-label bag each season.  Debt is now a 'four letter word' for Americans.  Consumers are taking a healthy dose of medicine, cutting spending to pay down debt and build savings.

"I’m from the government and I’m here to help."

The title quote by Ronald Reagan is found in a good piece on the changing Western financial system in the Financial Times, Liberalisation sews its own distruction.  This excerpt provides a macro view on the deleveraging that continues to sweep through all asset markets.

By intervening to keep their exchange rates down and accumulating foreign currency reserves, governments of emerging economies generated huge current account surpluses, which they recycled, together with inflows of private capital, into official capital outflows: between the end of the 1990s and the peak in July 2008, their currency reserves alone rose by $5,300bn.

These huge flows of capital, on top of the traditional surpluses of a number of high-income countries and the burgeoning surpluses of oil exporters, largely ended up in a small number of high-income countries and particularly in the US. At the peak, America absorbed about 70 per cent of the rest of the world’s surplus savings.

Meanwhile, inside the US the ratio of household debt to GDP rose from 66 per cent in 1997 to 100 per cent a decade later. Even bigger jumps in household indebtedness occurred in the UK. These surges in household debt were supported, in turn, by highly elastic and innovative financial systems and, in the US, by government programmes.

The article discusses the Western financial policies since WWII and revists the 1930s and the  resulting changes to the global economy including trade protectionism, socialism and communism.  The whole piece is lengthy but an interesting read as we sit in the mist of this economic storm.