Macy’s, Best Buy: Consumer Spending Continues to Decline

by: Ryan Barnes November 13, 2008 | about stocks: BBY / M    

Ryan Barnes

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Don't count on Santa this year...

On Wednesday, Macy’s (M) reported a $44 million loss in the third quarter on a 6% decline in comparable sales. While the comps result was slightly better than its competitors like J.C. Penney (JCP) and Kohl’s (KOL), somehow, Macy’s still felt it could reiterate its previous guidance for $1.10 to $1.30 EPS in the fourth quarter. But here’s the kicker: The company stated that previous guidance would hold so long as “consumer spending doesn’t deteriorate further in fourth quarter (from the third)”.

I can’t fathom how management feels this won’t occur. Macy’s thinks that by not participating in the massive product discounts we’ll soon be seeing at peers, they will preserve margins better. They are still fighting over a dwindling base of consumer dollars; what good is it to preserve margins if comps drop 20% in the most important quarter of the year?

If Best Buy Can’t, Who Can?

Meanwhile Best Buy (BBY), a company that many analysts thought would still generate sales growth in the fourth quarter, came out Wednesday morning and drastically reduced expectations for the last quarter and full year. Best Buy now expects EPS for the full year (ending February) to be $2.30 to $2.90, down from earlier estimates of nearly $3.40. Comps for the remaining four months could fall between 5% and 15%, and the full year comparable sales could fall as much as 8%.

Best Buy is a fine operator, but this news is flat-out scary. If Best Buy can’t do better than 10% declines in comparable sales, I weep for the prospects of everyone else. I look at consumer electronics as one of the few relative bright spots in retail - there are several product groups that have good tailwinds like HDTVs, notebooks, video games, digital music, and Blu-ray. And while I didn’t expect sales growth during the last quarter, I was hoping to see flat-ish results from retailers like Best Buy.

As I’ve stated on this site many times, I continue to be the most bearish on companies leveraged to discretionary income. On November 3, I expressed my extreme fear of Best Buy, as well as leisure names like Marriott (MAR), Starwood (HOT) and Wyndham (WYN). All have underperformed the S&P 500 substantially since my comments, and while I can also say the same about some of the Energy and Basic Materials names in the Secular Trends Portfolio (this is no time for big egos), I have to say I feel more comfortable owning the highly volatile latter sectors than Consumer Cyclicals. I see another 10-20% leg - or two - to the downside before we can begin to sort out the health of discretionary spending-based stocks.

We need to remember that the sectors we’ve seen the biggest losses in so far - industrials, materials, energy, financials - are companies that participate in the leading edge of the business cycle. Consumers are at the latter edge - we see it last, and live with it the longest. Sometime in the future, we will still think we’re in a recession while behind the scenes, the industrial names will be seeing the light ahead, ramping up production, and increasing earnings estimates. China alone has another $1.5 trillion in surpluses to spend on infrastructure, and you can bet they’ll do what it takes to keep domestic growth (and their regime) alive.

Disclosure: The author does not hold positions in the companies mentioned.

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