Reatiling suffers when discretionary income drops.
discretionary income: The amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of.
Once inflation sarts biting, the discretionary income goes to Dubai, Qatar, Venezuela, Canada, Angola as a payment for oil.
Retailers track this.
Credit Crunch Sends
More Consumers
To the Sidelines
By MARK GONGLOFF
May 3, 2008; Page B1
As hundreds of companies reported earnings during the past two weeks, their chief executives had a common refrain: consumers are worried and are cutting back on everything from premium coffee to motorcycles.
"What we saw in the first quarter was that the consumer wasn't shopping," Jones Apparel Group Inc. Chief Financial Officer John McClain said in the company's conference call Wednesday. The maker of Nine West shoes and other clothing reported a 59% year-to-year drop in first-quarter earnings, driven by slow traffic at its outlet stores and lower demand from department stores.
CONSUMER CAUTION
• The Trend: Consumers are still spending but are forgoing luxuries in favor of cheaper alternatives, company executives say.
• The Result: Profits at many companies are suffering.
• The Outlook: Executives aren't sure tax-rebate checks will boost their revenues later this year."We've really seen, in the U.S., a slowdown across all products, all vintages, all geographies," American Express Co. Chief Financial Officer Dan Henry said in his company's earnings call last month. The credit-card company last month reported a 6.2% decline in first-quarter profit, citing rising loan losses.
Consumer sentiment has been sinking for months. Tuesday, the Conference Board, a private research firm, said its confidence index fell to its lowest level since 2003.
While those surveys aren't always good predictors of consumer behavior, something is clearly going on now. Inflation-adjusted consumer spending expanded at a 1% annual rate in the first quarter, the slowest pace since the 2001 recession.
"The credit squeeze, its impact on housing, the loss of people's equity in their homes -- I think that is clearly affecting consumer behavior, along with rising fuel prices," Safeway Inc. Chairman and Chief Executive Steve Burd said in the grocery-store operator's earnings call.
He said that higher prices are driving customers to switch to Safeway's store-brand coffee from premium brands such as Starbucks. Starbucks Corp., meanwhile, warned last month that its quarterly results would fall short of expectations.
"When prices go up, demand dampens," Mr. Burd told analysts and investors last month. "That is what we all learned in Economics 101."
About 78% of the companies in the S&P 500 stock index have reported results for the first quarter, and in all, earnings look to be on track for a 15% decline. Strip out financial companies, which have gone through another quarter of mammoth write-downs, and profits are likely to be up 8% for the quarter.
RELATED STORY
Downgrades Show Storm Isn't Over
Credit-rating services downgraded the debt of mortgage lenders Countrywide and GMAC's ResCap. Credit markets have become calmer, but the downgrades are a reminder that some big financial institutions are still struggling.In a clear sign that consumers are cutting back on luxuries, earnings in the consumer-discretionary sector are on pace for a 15% drop in the quarter, while consumer-staples earnings are set to rise 11%, according to Thomson Reuters.
"Consumers continue to be influenced by their near-term economic fears," Joe Redling, NutriSystem Inc.'s president and chief operating officer, said in the diet-program company's call. Its quarterly profit sank nearly 63% on a 9% decline in revenue.
Consumers aren't shutting down their spending completely; they almost never do. But they are "trading down," or substituting cheaper goods for higher-priced goods.
MasterCard Inc. CEO Bob Selander told analysts and investors he had seen "a consumer shift away from discretionary purchases such as luxury retail and home furnishings to nondiscretionary purchases including food and gasoline."
In Coach Inc.'s conference call, CEO Lew Frankfort called store traffic in the luxury-handbag maker's full-price stores "weak," but said business was brisk at its factory outlets.
"Consumers are more pessimistic," he said. "We think it is going to be a rough go throughout the entire calendar year."
Coach's quarterly profit rose 8.3%, but it declined to offer a forecast for the rest of the year, citing economic uncertainty.
Harley-Davidson Inc. Chief Financial Officer Tom Bergmann said nervous customers are choosing to buy used Harleys rather than new -- "good news" in the long run, he said, because it hooks riders on the Harley brand.
The motorcycle maker reported a small decline in quarterly profit and warned the outlook for the rest of the year looked disappointing.
One area consumers aren't cutting back on is fancy TV sets. Demand for television sets, particularly those with liquid-crystal displays, has held steady for at least the past two quarters, according to Corning Inc. CFO Jim Flaws. The company's quarterly profit tripled, thanks largely to LCD demand. Mr. Flaws told investors that, "historically, TV sales are not usually impacted by recessions." Penny-pinched consumers may find it cheaper to stay home and watch TV than to go to the movies or sporting events.
Despite signs of some thawing in credit markets and a recent improvement in the stock market, few corporate executives are willing to sound the all-clear about the economy for the rest of the year.
"We don't see the current macroeconomic conditions improving," said Sam Martin, OfficeMax Inc.'s chief operating officer. "We are not economists, but that is our feeling. And from what we see and hear from our customers, we think...we're going to continue to face these macroeconomic conditions."
Some executives are skeptical about the economic boost of federal income-tax-rebate checks, totaling more than $100 billion, which are making their way to taxpayers.
Jones Apparel CEO Wes Card said the checks "could be a positive," but Safeway's Mr. Burd said, "The last time this was done by the U.S. government...it was not a noticeable event."
Write to Mark Gongloff at mark.gongloff@wsj.com |
