The Truth Behind Retail Sales

Horsing Around Shaun The Sheep GIF by MOODMAN
Don’t treat us like sheep!
  • July retail sales dropped 1.1% versus an estimate for a 0.3% drop.
  • Motor vehicle sales were the biggest factor.
  • Inflation should tame in the coming months, giving the Fed wiggle room.
  • Our notes below highlight the outlook for various industries from auto to healthcare.

TV armchair analysts gave us a perfunctory performance yesterday.

July retail sales dropped 1.1% versus an estimate for a 0.3% drop.

Pundits had their reason for the market pullback.

Nevermind that options expiration week is often more volatile.

Or that gauging the exact tenth of a percent after a volatile year is irrelevant.

They did the minimum.

We know better.

Digging into data provides a wealth of information.

What WE FOUND in July retail sales can help you make investment decisions NOW.

What you need to know

Headlines blamed COVID for poor July retail sales.

That same day, Wal-Mart beat estimates, citing strong back to school sales.

Neither of these are true.

Here’s the key points:

  • Motor vehicles & parts declined 3.9% month-over-month (MOM), accounting for -0.4% of the -1.1% decline.
  • Clothing was down 2.6% MOM.
  • Non-store retailers were down 3.1% MOM accounting for -0.21% of the -1.1% decline.
  • Gas stations rose 2.4% MOM contributing +0.1% to the -1.1% decline.
  • General merchandise stores and department stores were down a touch MOM.

The big takeaway

None of this had to do with COVID and everything to do with inflation and inventory.

With new and used auto prices skyrocketing, inventory plummeted.

Guess what that leads to?

Lower auto sales.

Our second level insights

Combining this information with the latest Consumer Price Index (CPI) data, we can make some educated guesses.

Inflation – With autos, especially used, contributing a huge chunk to CPI increases, lower sales should increase inventory. Coupled with rising Delta cases and slower price increases in August, we can expect CPI increases to slow in the coming months.

That leaves the Fed more leeway to keep rates low and put off their taper – both boons to equity and bond markets.

Autos – Fed data suggests auto loans may have peaked in the last two months. With chip supply constraints and steel prices increasing at a much faster rate than sales prices, their best quarters may be behind them. Without a significant shift in commodity prices and supply constraints, these stocks will be lucky to tread water.

Retailers – If back-to-school helps retailers, then it’s a fleeting boost. The question is whether their low inventories are a boon or a sales problem. Normally, inventory controls lead to better margins. Yet, it’s far worse to underutilize store capacity.

Travel – While higher gasoline sales aren’t themselves enough to say we want out, increased hotel utilization has brought them close to pre-pandemic levels. Americans can’t or aren’t willing to travel abroad, and visa versa. That’s left airlines suffering while hotel chains improve, especially those with a heavy U.S. footprint.

Earnings – It’s pretty clear that CEOs don’t know what to expect. Some have more visibility than others. But the majority are like the rest of us. They can’t figure out where things are headed, not without more certainty around the Delta variant and whatever comes after. That could lead to some nasty earnings surprises next quarter.

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