MorningWord 10/9/13: Consumer No Bueno $COST, $FDO, $YUM

by Dan October 9, 2013 8:47 am • Commentary

MorningWord 10/9/13:   Despite some fairly high profile Q2 earnings misses from retailers in August (COH, M, RL, TGT & WMT) the XRT and the XLY nearly matched and made new all-time highs respectively with the SPX in September.

The commentary from financial pundits has been that the U.S. consumer is “resilient”, despite sluggish job growth and a housing market that may be stalling. The reasons given for the resiliency are all forward looking, and largely to do with the continuation of accommodative Fed policy, which in my mind has always equated to very wishful thinking, especially at this stage of the recovery.

I have often said to the readers of this site, look around you, ask your family, friends or co-workers, are they secure in their employment situation?  Do they feel confident about their near term ability to make more money, despite working harder/longer?  If they own a home, are they back to break-even after all of the improvements that they made?  Have they participated in the stock market rally of the last few years or have they gotten shaken out at numerous occasions due to the volatility caused by the transitions in Fed QE and the multitude of geo-political events?   I assume there are very few out there that just feel great.

This morning the news for consumer stocks looks less than enthusiastic and does not paint a very pretty picture for Q3, courtesy of Bloomberg:

  • YUM Cuts Yr EPS View; Sees China 4Q Comps. Decline
  • Costco 4Q Adj. EPS Misses Est., Sept. Comp Sales Miss Est.
  • Family Dollar Sees Lower 1Q Comps; 4Q Comps, Rev. Miss
  • Sears Selling Some Profitable Stores to Raise Cash: WSJ
  • Del Frisco’s Sees Yr EPS 89c-93c, Saw 92c-96c, Est. 94c

I guess the positive takeaway is that the quarter just reported is already in the tank, and that downbeat forward guidance has the potential to set up for future beats.  However, the main takeaway here is yes price is truth, but don’t be fooled by the performance of ETFs, look at some of the influential underlying stocks, and what their managements are saying, and what the price action in the stocks are saying.

YUM is a good example of a stock that has been a relative under-performer, despite spending the last year in shooting distance of new all time highs.  Every quarter and every month during that time period they have had different reasons for comp sales misses here and in China.  They have become very good at finding one off things to explain away disappointments.  This ultimately amounts to a credibility problem in my mind.  But again, the company in 2013 is on track to have its first earnings decline in more than 10 years and trades at above a market multiple and very rich to peers like MCD, sometimes it makes sense to look at the hard data and filter the noise.

The most salient point, though, is that the market has shrugged off mediocre earnings for almost 2 years now, with hope driving stocks higher more than facts. If Q3 earnings season continues like this, then the cold, hard wall of facts might finally force investors to take off their rose-colored glasses and look at the reality of the situation.