ETFs

Retail Health Remains Questionable

As the economy starts to recover and consumers start to come out of their shells, retailers have reaped the benefits of extra spending.  Some are even taking on additional efforts to retain these customers and their spending habits; however, the likelihood that these trends are sustainable is unclear.

According to the most recent report issued by the Commerce Department, a range of retailers boasted month over month gains, enabling the sector as a whole to show seasonally adjusted increases of 0.3% in February over the prior month.  Additionally, a Thomson Reuters index of 28 retailers suggests that sales at stores open at least one year, rose 4% in February compared with a year ago.  

Of all the retail sub-sectors, electronics and appliances saw the largest gains followed by groceries.  Despite wary consumer sentiment over the health of the economy, illustrated by the recent decline in the University of Michigan/Reuters consumer-sentiment index, which registered at 72.5, some retail experts suggest that consumers see the light at the end of the tunnel and are starting to upgrade their appliances and adding additional items to their shopping baskets at the checkout line.

A second force behind this trend is that retailers have adapted to recession-induced frugality, restricting inventories and introducing lower cost products that are helping increase foot traffic and are likely to continue to do so. 

High end retailers Prada and Gucci tweaked their brands and product line to acclimate to the price conscious consumer.  Additionally, Wal-Mart (WMT), who seemed to reap some of the benefits of changes in consumer consumption driven by the recession, has noticed the opposite effect, a decline in traffic.  As a result, the world’s largest retailer has recently announced that it will use aggressive pricing in grocery and other units to attract shoppers and construct an environment where prices are too good to pass.  More specifically, the company is expected to rollback prices on 10,000 items, primarily focusing its price cuts on food and other consumables.  

Although consumers are willing to spend and retailers are making it easier to spend, macroeconomic factors are likely to put a damper on this upward trend.  Wages are remaining stagnant, consumers are taking on large sums of debt and credit still remains difficult to obtain, all factors that cause disposable income to slowly dwindle away.   To make things even more challenging, according to prominent economic officials like Treasury Secretary Timothy Geither, unemployment rates are likely to remain elevated for an extended period and may even rise in the near term as discouraged workers start to job hunt again.

These forces will make it difficult for consumers to sustain the levels of spending seen in February.  With this in mind, the use of an exit strategy which indicates a price points at which an upward trend could come to an end is highly valuable. 

Some obvious equities that are likely to be influenced by the retail sector include the SPDR S&P Retail (XRT), the Retail HOLDRs (RTH) and the PowerShares Dynamic Retail (PMR).  XRT, RTH and PMR closed at $41.32, $100.43 and $17.71 on Monday, respectively. 

Other equities that are likely to be influenced include 

  • Consumer Staples Select Sector SPDR (XLP), which boasts Wal-Mart and Proctor & Gamble (PG) as its top holdings.  XLP closed at $27.91 on Monday.
  • iShares Dow Jones US Consumer Goods (IYK), which includes companies like Coca-Cola (KO) and Kraft Foods Inc, (KFT) in its top holdings.  IYK closed at $59.69 on Monday.
  • Vanguard Consumer Staples (VDC), which allocates nearly 75% of its sector weighting to consumer goods.  VDC closed at $69.70 on Monday.

According to the latest data at www.SmartStops.net, an upward trend in these equities could come to an end at the following price points:  XRT at $39.32; RTH at $96.97; PMR at $17.04; XLP at $27.24; IYK at $58.34; VDC at $68.10.  These price points fluctuate on a daily basis and are reflective of market changes.  Updated data can be found at www.SmartStops.net.

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