As momentum of a broader economic expansion picks up and the labor market starts to stabilize, middle-class consumers are starting to shun away from low price alternatives beaming a ray of sunshine on higher-end retailers.
This trend is evident in the most recent earnings releases of some of the largest U.S. retailers. Wal-Mart (WMT), the world’s largest retailer and beneficiary of new customers trading down at the heart of the Great Recession, recently reported sluggish first quarter sales. In fact, first-quarter sales for stores open more than one year at Wal-Mart’s domestic locations fell for the fourth consecutive quarter and forced the company to paint a bleak picture for the second quarter. One driver behind this trend is that Wal-Mart is seeing a decline in foot traffic as middle-class consumers are feeling a bit more optimistic and turning to higher-end retailers.
It appears that these consumers have turned to the likes of Saks Inc. (SKS), Nordstrom (JWN), Target (TGT) and Home Depot (HD), as they have increased their expenditures. Saks recently reported increases in revenues of 6.9%, increased margins and its first quarterly increase in sales at stores open for at least year over the last two years. In fact, this recent boost in consumer confidence has led the New York based retailer to increase its forecast for sales at stores open at least one year. Saks closed at $8.99 on Wednesday and is up 119% over the last year.
Nordstrom has witnessed a similar trend as that of Saks, as it recently saw same-store sales increase by 12%. This increase in foot traffic, combined with upticks in revenue, have lead to the Seattle-based company to raise its quarterly dividend by 20%, indicating that cash is on the balance sheet. Nordstrom closed at $38.41 on Wednesday and is up nearly 69% over the last year. Nordstrom closed at $38.41 on Wednesday and is up nearly 69% over the last year.
Another indicator that a shift in consumer behavior is on the horizon is evident through the performance of Target. The Minneapolis based retailer reported a 29% increase in first-quarter net income, a 5.5% increase in sales, a jump in sales at same stores open at least a year by 2.8% and increased foot traffic of 2.2%. Target is a direct competitor with Wal-Mart, but tailors its offerings to a higher-end clientele base and the numbers suggest that the retailer is winning customers back. Target closed at $54.03 on Wednesday and is up nearly 31% over the last year.
Lastly, the nation’s largest home improvement retailer, Home Depot, kept the ball rolling as it witnessed an increase in foot traffic by nearly 13 million customers, an increase in its number of transactions, jumps in revenue of 4.3% and an increase in sales at stores open at least one year by 4.8%. Home Depot closed at $34.38 on Wednesday and is up nearly 37% over the last year.
In a nutshell, middle-class consumers are loosening the grip on their wallets, consumer confidence appears to be elevating and sales of discretionary items are increasing. However, risks in the sector are still highly prevalent as the overall health of the economy and consumer sentiment continues to improve but remains fragile.
A good way to protect against this risk is through the use of an exit strategy which identifies specific price points at which upward trends could come to an end. According to the latest data at www.SmartStops.net, an upward trend in the mentioned companies could come to an end at the following price points: SKS at $7.85; JWN at $36.01; TGT at $51.67; HD at $32.50. These price points are reflective of market conditions and volatility and change on a daily basis.
Disclosure: No Positions