Latest Economic Data Support Bright Holiday Spending View
09:06am EST 10-Nov-97 Goldman Sachs (BOLOTSKY,STRACHAN) HD WMT S JCP MAY TOY DH
GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS
Goldman, Sachs & Co. Investment Research
Retail Spending Outlook
* * Latest Economic Data Support Bright Holiday Spending View * *
David Bolotsky (212) 902-6798 - NY Equity Research
George Strachan (212) 902-6708 - NY Equity Research
=================== NOTE 9:00 AM November 10, 1997 ====================
Stk Latest 52 Week Mkt Cap YTD Pr Cur
Rtg Close Range (mm $) Change Yield
--- ------ ------- ------- ------ -----
The Home Depot, Inc. MO 56.88 59-31 41520.2 70% 0.4%
Wal-Mart Stores, Inc. MO 36.25 40-22 81688.0 59% 0.7%
--------------Earnings Per Share---------------
HD Apr Jul Oct Jan FY CY
1999 FY 2.00
1998 FY 0.35A 0.48A 0.39 0.41 1.63
1997 FY(A) 0.27 0.37 0.30 0.34 1.29
WMT Apr Jul Oct Jan
1999 FY 1.75
1998 FY 0.29A 0.37A 0.35 0.55 1.56
1997 FY(A) 0.25 0.31 0.30 0.48 1.33
-Abs P/E on- -Rel P/E on-- P/NxtFY LT EPS
Cur Nxt Cur Nxt EBITDA Growth
----- ----- ----- ----- -------- ------
HD FY 34.9X 28.4X 1.8X 1.6X NA X 20%
WMT FY 23.2X 20.7X 1.2X 1.1X NA 13
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This document also contains comments on S, JCP, MAY, TOY, DH, FD, CC, BBY.
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* The latest wage, borrowing, and housing data support a bright holiday
spending outlook.
* 1) Real wage growth continues to accelerate. Real average hourly
earnings rose 1.8% year-to-year in September, maintaining their highest
growth rate in 20 years. We expect an increase of 2.0% in October based
on an exceptionally strong nominal gain of 4.2% for the month. 2)
Installment debt grew at a modest $24 billion annualized rate in
September, but after being a steady drag on spending for nearly two
years, year-over-year comparisons have eased significantly. 3) After
twelve months of sluggish growth, housing turnover, the most important
lead indicator for sales of big ticket durables, has accelerated to a 7%
year-over-year increase.
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OUTLOOK FOR THE HOLIDAYS IS BRIGHT:
The latest government economic data supports a positive outlook for the
holiday shopping season. Our three key lead indicators, real wages,
consumer borrowing, and housing sales, all have improved in recent months.
We expect continued strength in all three of these indicators, supporting
our outlook for a robust holiday 'spending season.'
REAL WAGE GROWTH IS AT ITS HIGHEST LEVELS IN 20 YEARS:
Wage growth has continued to accelerate throughout the autumn, providing a
solid underpinning for strong consumer spending growth. A nominal gain of
3.7% in the Labor Department's earnings statistics translated to a 1.8%
increase in real wages for September. With an even stronger 4.2% nominal
increase just reported for October, we expect a 2.0% gain in real wages for
the month, representing continued exeleration from the 1.0% level at the
beginning of the year. Our Economics Research Group forecasts that this
acceleration will continue into early next year, reaching a 2.3% year-over-
year increase for the first quarter of 1998. This improvement is even more
impressive in light of the fact that real wages have actually DECLINED in
14 of the past 15 years.
INSTALLMENT DEBT LESS OF A DRAG AS COMPARISONS EASE:
September growth in installment debt slowed to a $24 billion annualized
rate, bringing third quarter borrowing growth to an annualized $49 billion
rate, well below the $86 billion increase posted in third quarter of 1996.
This slowdown translates to a $37 billion 'drag' on spending growth, or
0.8%, which compares to third quarter personal consumption expenditure
growth of 5.7%.
We regard this trend as encouraging for two reasons. 1) In spite of this
drag on spending from borrowing, retail sales were solid in the third
quarter, with the Goldman Sachs Retail Composite (same-store) up an
impressive 4.5%, bolstered by the aforementioned real wage growth and gains
in employment. 2) Borrowing growth slowed materially in the fourth quarter
of 1996 to a $40 billion annual rate, implying that if the third quarter
1997 trend of $49 billion is sustained, borrowing growth will actually be a
slight ($9 billion) stimulus to spending.
HOUSING TURNOVER IS ACCELERATING:
Housing turnover (new and existing home sales) is the most important lead
indicator for the purchases of big ticket consumer durables. It has been a
neutral to slightly negative lead indicator for consumer spending this year
as a result of higher interest rates. With rates having turned back down,
however, housing turnover has accelerated sharply during the last few
months, reaching 7% growth in September.
We think that this acceleration is sustainable. 30-year mortgage rates are
at a three-year low of 7.2%. In addition, mortgage purchase applications,
which lead housing turnover, have risen by over 20% during September and
October. Throughout most of 1997, sales for the hardlines retailers,
including big ticket durables, have lagged other retail sectors. Bolstered
by the recovery in housing turnover, as well as easy year-ago comparisons,
results have begun to recover, a trend we expect to gain momentum in the
coming months.
Important Disclosures (code definitions attached or available upon request)
HD : No Disclosures
WMT : DIR,M,CP,CF
S : M,CF,CPF
JCP : No Disclosures
MAY : No Disclosures
TOY : CP,CF
DH : M,CP,CF
FD : M,CF,CD
CC : M
BBY : M,CPF
=============== Further Information ===============
This investment commentary was made available on the Goldman, Sachs & Co.
Research Xpress at 09:02 New York time on 11/10/97.
Please contact your Goldman Sachs representative for additional details.
(C) Copyright 1997 Goldman, Sachs & Co.
First Call Corporation - all rights reserved. 617/345-2500
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