Tickers in this Article: WMT, TJX, SKS, URBN
October's 0.5% bump-up in consumer retail spending was enough to prod stocks, especially retail stocks, higher when the news came out on Nov. 17, 2011. As has been becoming clearer each time the Department of Commerce posts the monthly numbers, though, not every retailer is benefiting from the revival of retail spending. The men are being proverbially separated from the boys, and these specific trends need to be noted by investors, especially now that Q3's earnings are starting to jive with the monthly sales reports.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Like the Numbers Said ...
Take general merchandise stores, for instance; an admittedly diverse group, which can include higher-end names like Saks Incorporated (NYSE:SKS), discounters like TJX Companies (NYSE:TJX), or value-leaders in the general merchandise arena, like Wal-Mart Stores (NYSE:WMT). As a whole, the group has been struggling for more than a while and that didn't change in October. In fact, the August-October comparison of its retail sales to the May-July period, showed a mere 0.9% improvement and actually showed a 0.5% decline in sales, when only considering the department stores, exclusive of general merchandise stores. For October alone, general merchandise store sales were flat, versus an average 0.5% uptick for all categories.

As such, it should come as no surprise that Wal-Mart posted unimpressive third-quarter numbers. Though earning per share were up from 95 cents to 97 cents, actual income fell from $3.44 billion to $3.34 billion, despite a revenue increase of 8.2%. The silver bullet that sent Wal-Mart shares lower, however, was the fact that per-share earnings were a penny short of estimates, while same store sales were up a pretty tepid 1.3%. (To know more about earning per share, read: The 5 Types Of Earnings Per Share.)

On the Other Hand
Department store Saks Incorporated's Q3 results were somewhat reversed, meaning it topped estimates, but profits still fell from a year ago. The retailer earned 11 cents per share, versus an expectation of 9 cents, and a comparison to a profit of 20 cents per share, a year ago. Of course, 14 cents of that 20 cents was the benefit of a one-time gain, so the bottom line technically increased quite nicely for Saks. The litmus test is revenue, however, and it's on this front where Saks Incorporated really proved its mettle; revenue was up about 5%.

For the TJX Companies net income was up 9.0%, while revenues were higher by 5.0% last quarter. Same-store sales were up 3.0%. Clearly Saks and TJX were an exception to the rule, last quarter. (To know more about income statement, read: Understanding The Income Statement.)

Last and Also Least
Almost as bad as the department stores, clothing stores and smaller shops saw sales shrink by 0.7% in October, and only grow a paltry 0.9% over the past three months, versus the three months before that. For comparison, the average growth of retail sales in that timeframe was 1.6%.

Somewhat in line with that weakness last quarter was Urban Outfitters (NASDAQ:URBN), whose income plunged 23.3%, from 43 cents per share to 33 cents. It was still better than the estimated 31 cents, but that's a dubious honor. The sales increase of 6.3% defied the bigger industry trend, but still didn't matter one iota; the stock barely budged for the day, as investors dwelled on a terrifying surge in expenses and inventory levels.

The Bottom Line
In most cases the revenue increases don't feel consistent with the sales weakness implied by the Department of Commerce's data; that's because the two are indeed inconsistent. Still, the Department of Commerce's retail sales figures have managed to spot a couple of underlying profit problems, namely Urban Outfitters and Wal-Mart. If the overall group is struggling to generate sales at all, then odds are good that any of the names in that group that are pumping up the top line, are more than paying for it at the bottom line. The moral of the story is, it pays to take a step back and look at the bigger picture.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, James Brumley did not own shares in any of the companies mentioned in this article.

comments powered by Disqus

Trading Center