April Consumer Spending Declines: What This Means for Investors

Source: Thinkstock

Source: Thinkstock

On Friday morning, the Commerce department reported that consumer spending fell slightly — by 0.1 percent — in April. This fits with a larger pattern that has been emerging throughout the first half of 2014, namely retail sales have been weak and retail companies have generally been underperforming with a couple of exceptions.

If you look at retailers broadly through the SPDR Retail ETF (NYSEARCA:XRT), you’ll find that retail stocks have significantly underperformed the broader market. This fund is down over 5 percent year-to-date versus the S&P 500, which is up about 4 percent.

A look at some individual companies is even more telling. Many retailers are seeing profit declines even if their net sales figures are rising. Companies that fall into this category include:

Furthermore, there are several retailers that are growing their sales, but which are growing their profits at substantially lower rate. Costco (NASDAQ:COST) and Chipotle Mexican Grill (NYSE:CMG) fall into this category.

This is due to margin contraction: input costs such as agricultural commodities and energy costs are rising, and retailers are put in a position in which they either have to raise prices or accept lower profits.

But not only are quality retailers (from an investment standpoint) such as Costco and Panera suffering, but there are many retailers with their own individual problems. For instance, we are all aware of the difficulties that Target (NYSE:TGT) has been having after the December data breach, and this company is going to suffer so long as consumers are concerned that their credit card information will be stolen if they buy something at a Target store. We also have specific sub-sectors of the retail industry that are suffering, such as the office supply sector and the sporting goods sector. Last week, Staples (NASDAQ:SPLS) and Dick’s Sporting Goods (NYSE:DKS) reported weak earnings, and while these situations have possibly created some intriguing contrarian speculation plays, I think they also serve to shed light on this troubled industry.