(AZO) U.S. Retail on the Rise

Total Retail Sales rose 0.5% in October on top of a 1.1% rise in September. Relative to a year ago they are up 7.2%. While the number is not adjusted for inflation (it is, but only for seasonality and holidays) it is still a strong showing. It was also better than the expected rise of 0.4% for the month.

Retail sales is a very broad measure of consumer spending, not just what is going on at the shopping malls. What happens on the car lots can make a big difference. That said, excluding autos sales, they were up 0.6% for the month after rising 0.5% in September (revised down from up 0.6%) and are up 7.3% year over year.

The ex-autos number was much better than the expected rise of just 0.2%. Sales of autos and parts dealers such as AutoZone (AZO) rose 0.5%, but that is after a massive 4.2% surge last month. On a year-over-year basis, sales are up 7.0%.

More Pain at the Pump?

For most of past year, the rise in retail sales has been led by something that is not really good news: higher sales at gas stations. Remember, this data is not adjusted for inflation, and the actual consumption of gasoline is down year over year. It wass all about higher prices at the pump. That was not true this time around, as gas station sales fell 0.4% — partially reversing a 0.7% rise in September.

However over the last year, sales at the gas stations are up 15.6%, more than double the overall rise in retail sales. That suggests that headline CPI might be lower than core inflation when it is released tomorrow, except for one thing: sales at grocery stores were up 1.1% after falling 0.2% last month, but year over year are slightly below the overall level of retail sales, with a 6.6% rise. I suppose it is possible that in September everyone was eating hot dogs off the rollers at the gas station instead of cooking at home, and for some reason that reversed this month, but I doubt it.

People more or less have to spend money on food and fuel, and thus changes in sales tend to reflect changes in prices more than changes in volumes sold. The strong monthly sales at grocery stores is obviously good news for firms like Kroger’s (KR).

In gauging the health of the economy and the real mood of the consumer (as opposed to the consumer sentiment and confidence surveys), it is worth looking at how the more discretionary areas of retail sales are doing. It is much easier to put off the purchase of a new sofa or washing machine than it is to put off going to the grocery store, or refill the tank when you are running on fumes.

Discretionary Retail

The more discretionary categories were mixed, as they were last month, but those that did well last month were soft this month, and vice versa. Furniture is perhaps the most discretionary of all the categories. It showed a 0.7% drop on the month, but that was after a 1.2% rise in September.

The story at electronics and appliance stores, like Best Buy (BBY) was diametrically opposite, with a 3.7% surge in October versus a decline of 0.3% in September. On a year-over-year basis, though, both are at the weak end, with furniture up 3.4% and electronics up 3.7%.

Electronics is a bit of a special category, however, since prices of electronic gear tend to fall over time. Sales at sporting goods and hobby stores, such as Dick’s Sporting Goods (DKS), were strong for the second month in a row — rising 1.3% after a 0.9% rise in September and are up 9.1% year over year.

Clothing is just a bit less discretionary than sporting goods, but you can still defer purchase of a new pair of jeans if times are really tough. Those sales were down 0.7% after a 1.7% rise in September. Year over year, sales are up 5.8%. Building materials stores such as Home Depot (HD) saw a 1.5% surge on the month after rising only 0.1% in September, and are up 5.6% year over year.

Other Retail Areas

Sales at drug stores like Walgreens (WAG) were up a strong 0.7% on the month, but this is after being unchanged in September and over the last year up just 4.4%. Those sales are in the non-discretionary camp, along with sales at grocery stores.

Aside from gas stations, the strongest year over year sales gains have come from the non-store retailers, such as Amazon (AMZN), with a 11.1% rise. They surged this month by 1.5% after a rise of just 0.3% in September.

Report Card: A-/B+

Overall I would have to rate this as a very good report. It was much better than expected when one strips out autos sales, and nine of the 13 types of stores saw increases on the month. While that is down from ten of 13 up in September, it still represents broad-based increases in retail sales.

Year over year, all 13 types of stores are showing increases. The smallest year-over-year increase is the 3.4% rise at furniture stores. With core inflation running below 2.0%, that means that the consumer is buying more stuff pretty much across the board. Since the consumer is such a huge part of the overall economy (71%), this suggests that we will see relatively strong economic growth in the fourth quarter, at least along the lines of the 2.5% growth we saw in the third quarter.

Some of that seems to be based on a declining savings rate, as income gains have not been keeping up with spending gains. One does have to question the sustainability of the retail sales gains into next year unless we star to see a pickup in employment and/or wage and salary gains. However, for the time being things are looking pretty good.

AMAZON.COM INC (AMZN): Free Stock Analysis Report

AUTOZONE INC (AZO): Free Stock Analysis Report

BEST BUY (BBY): Free Stock Analysis Report

DICKS SPRTG GDS (DKS): Free Stock Analysis Report

HOME DEPOT (HD): Free Stock Analysis Report

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WALGREEN CO (WAG): Free Stock Analysis Report

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