Retail Sales Reflect Consumer Pressures

A Commerce Dept. report shows anemic gains for October as gas prices, mortgage payments, and heating bills drag down purchases

by Pallavi Gogoi

No one disputes consumers are under cost pressures: higher gasoline prices, higher mortgage payments, higher winter heating bills. That has worried investors hunting for signs of hope. On Nov. 13, many clung to a respectable income report from Wal-Mart Stores (WMT), the world's largest retailer. The company topped Wall Street's forecast and saw its shares surge more than 6%. A day later, figures on October retail sales showed that the retail stock rally was more wishful thinking on the part of investors than any real change in consumer spending.

Retail sales data released Nov. 14 by the U.S. Commerce Dept. show total retail sales increased a mere 0.2% from last month as consumers refrained from purchasing furniture, sporting goods, and general merchandise. "Gas prices and other economic issues are beginning to have an effect on consumer spending," says Rosalind Wells, chief economist at the National Retail Foundation.

AAA's Daily Fuel Gauge Report shows that motorists nationwide paid an average of $3.11 per gallon of gasoline on Nov. 14, up from $2.75 a gallon a month ago. Guy Caruso, head of the Energy Information Administration, an arm of the U.S. Energy Dept., warned that gasoline prices, while high, don't yet fully reflect the price of crude oil, which is trading around $94 per barrel. On Monday, the U.S. Energy Dept. warned prices could rise another 20¢ a gallon over the next two to three weeks if refiners pass along the increase in crude oil prices.

Price Breaks Needed

Retail chiefs are echoing the cautionary sentiments. Macy's (M) reduced its revenue forecast for the year, to $26.4 billion to $26.6 billion, from $26.5 billion to $26.8 billion, and reported a 0.8% decline in same-store sales in the third quarter, even though its net income of $33 million beat Wall Street estimates. Macy's shares dropped nearly 4%, to $29.60 in early afternoon trading. Macy's Chief Executive Officer Terry J. Lundgren said the company is in a "challenging economic environment," but expressed hope that consumers would be lured by his store's "wide range of new and distinctive merchandise for the holiday season."

Several analysts and economists certainly feel that price breaks, rather than "new and distinctive" hype, are what will attract consumers of all income levels. Wal-Mart certainly signaled that its core group of low income consumers are responding, and spending more per visit at the store. But additional price cuts might be necessary to lure shoppers—Wal-Mart's U.S. division CEO Eduardo Castro-Wright noted store traffic was off in the third quarter.

Signs of Weakness in Luxury

And Brian Bethune, an economist at financial analyst Global Insight, believes that while low-income consumers will feel pressure from higher oil prices, upscale shoppers won't feel like spending too much with heads rolling on Wall Street, and the possibility of lower bonuses this holiday season due to choppy financial markets. "My sense is that the high-end retailers will be starting to discount too if they want to move merchandise," says Bethune.

There are already signs of weakness in the luxury sector. Coach (COH), the maker of upscale leather handbags and purses, has been a Wall Street darling for several years. But earlier this month the company said fewer shoppers were visiting its stores in California and the Northeast. "Traffic slowed most notably toward the end of the period," CEO Lew Frankfort noted in a conference call with analysts to discuss the company's fiscal first quarter earnings. Investors beat down the stock, which was trading at around $35, $5 above its 52-week low. Another luxury retailer, Nordstrom (JWN), reported that its same-store sales dropped 2.4% in October, which was the first sales decline at the company since early 2003. At $34, Nordstrom shares are also near their 52-week low.

Gogoi is a contributing writer for BusinessWeek.com.