Consumer Stocks Stall Amid Surprising Earnings

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In the new year, more expensive retail options have been gaining ground. The discount Old Navy apparel chain, owned by Gap (GPS), boosted same-store sales 10% in January, 0.6% below analyst expectations. But the Gap's priciest chain, Banana Republic, surprised Wall Street with a 4% rise in sales, far better than the 1.2% decline analysts had predicted. "We're starting to see an opening of purse strings [that] were really closed in 2009," Walters says. Having adjusted to a lower level of spending in the past year, the consumer "feels a little less hesitant to spend when she wants to," particularly at favorite stores, Walters says.

So far in 2010, Macy's shares are down 2.5% and Gap's stock is off 5.6%. Despite its outsized January sales, Nordstrom shares have dropped 9.1%.

If investors seem less than impressed, it may be a sign of widespread skepticism that U.S. consumer spending can maintain momentum. After two years of job losses, shrinking retirement portfolios, and declining home values, consumers could take time to place trust in an economic recovery. In January, the U.S. unemployment rate fell from 10% to 9.7%, but nonfarm payrolls declined 20,000. Against this backdrop, LPL's Kleintop says he is looking for opportunities to move out of consumer stocks. "The consumer is still in a pinch," he says, with many households "mired in a tremendous amount of debt."

business spending surpasses consumers'

Ford Motor (F) saw a 5% drop in January sales, following an 18% increase in December. December's strength simply didn't continue into January, said Ken Czubay, Ford's U.S. marketing vice-president, to analysts. "That speaks to the challenging conditions we are likely to face all this year, with an economy that [seems] stuck in first gear," Czubay said. Without discounts and other incentives, "we can't seem to get the traction in the consumer's mind."

In better shape are the balance sheets of many businesses, at least those outside the financial sector. This could benefit industrial and technology stocks, Kleintop says. Their business customers "have the ability to spend where the consumer doesn't."

The strength of business spending over consumer spending was illustrated in the last quarter's report on U.S. gross domestic product. Consumption spending increased 2% while spending on equipment and software surged 13.3%.

In 2010, a true consumer recovery—and robust advances for consumer stocks—will need a strong recovery in jobs and the housing market, says Terry Morris, senior equity manager at National Penn Investors Trust. "That's the fuel for consumer confidence," he says.

Consumer spending may have stabilized after a period of steep declines, and some customers are beginning to treat themselves to modest luxuries. But the consumer sector has a long way to go before it can claim to be healthy.

Steverman is a reporter for Bloomberg BusinessWeek's Finance channel.

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