April Retail Sales - Another Take

Highlights include JC Penney Co., Inc. (JCP - Analyst Report), Macy's, Inc. (M - Snapshot Report), Cost Plus, Inc. (CPWM - Analyst Report), Wal-Mart Stores, Inc. (WMT - Snapshot Report) and Costco Wholesale Corp. (COST - Snapshot Report).

This morning the U.S. Census Bureau announced that April retail sales declined 0.4% vs. expectations of 0.0%; retail sales (ex-auto) declined 0.5% vs. expectations of +0.2%. March retail sales were revised lower.

Department stores, electronics, food/beverages, furniture, and online all experienced sales declines in April. Restaurants, sporting goods, health/personal care, and building materials all saw gains in April. On a year-over-year basis, retail sales fell 11.4% in April. The market was clearly disappointed by this news.

This was the second straight monthly drop in retail sales, and the eighth decline in the last ten months. Recall that retail sales increased in January and February, and the equity market gravitated to the idea that consumer spending bottomed out in the fourth quarter of 2008. However, it now appears that the first two months of 2009 were outliers and the downward trend in retail sales -- albeit at a slower rate than the second half of last year -- remains intact.

For several months, we have discussed how wealth destruction from falling equity markets and home prices, higher unemployment and shrinking consumer credit will continue to be headwinds for the consumer. Our view has not changed. Moreover, those headwinds, combined with record levels of consumer debt, have altered consumer behavior.

Consumers are saving more, reducing debt and trading down to cheaper substitutes. These trends are going to be with us long after the economy has stabilized and begins to grow again.

After the recent rally in retail stocks, which are still up about 16% year-to-date, now would be a good time to take profits in names like JC Penney (JCP - Analyst Report) up 98% from its March lows, Macy's (M - Snapshot Report) up 88%, and Cost Plus (CPWM - Analyst Report), up over 200%.

We would focus exposure to the more defensive names like Wal-Mart (WMT - Snapshot Report) or Costco (COST - Snapshot Report), both of which will continue to benefit from consumers becoming more frugal and saving more.