Ahead of Wall Street - December 13, 2011

Tuesday, December 13, 2011

Europe will likely be less of a factor in today’s trading action as the market’s attention shifts to pressing domestic matters. Few surprises are expected from the FOMC statement this afternoon at the conclusion of the Fed’s last meeting of the year. But this morning’s weaker than expected Retail Sales report puts a dampener on rising expectations on the consumer spending front. The earnings miss from Best Buy (BBY - Analyst Report) will not help matters either.
 
We got a weaker than expected 0.2% increase in November Retail Sales, after a 0.6% gain in October that was revised upwards from the originally reported 0.5% increase. 'Core' Retail Sales, which excludes automobile and gasoline sales data, also came in weaker than expected. I don’t think today’s Retail Sales miss materially damages the emerging narrative of recovering consumer spending, but it is nevertheless disappointing.
 
The Retail Sales report is admittedly not a perfect proxy for consumer spending since it only includes 'goods' sales at retail establishments and leaves out the much bigger consumer outlays on 'services'. But it nevertheless provides valuable clues to trend in consumer spending, which is the backbone of the U.S. economy. Recent favorable trends in the labor market and improving consumer confidence readings, coupled with the strong Thanksgiving weekend sales numbers, had raised expectations for today’s Retail Sales report. This report is not only out of line with those readings, but also partly reverses the positive Retail Sales momentum of the last two months.
 
In corporate news, we got an earnings miss from Best Buy, as aggressive promotional efforts appear to have offset top-line gains and weighed on the electronic retail giant’s gross margins. Urban Outfitters (URBN - Analyst Report) provided same-store sales update for the fourth quarter that came in above expectations. And Cosi (COSI) announced Carin Stutz of Brinker international (EAT) as the company’s new CEO.

Sheraz Mian
Director of Research

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