Go to previous page       

Johnson has tracked a steady decline in department store sales, which have seen their market share of general merchandise sales shrink from 35% to 15% over the last 15 years.  This market share has been picked up by the big box retailers like Wal-Mart and Costco.  Johnson expects this trend to continue, and the effect can be detected on a monthly basis (adjusted seasonally).

“Macy’s, Sears, and J.C. Penney are bleeding market share,” says Johnson, adding that “even higher end venues like Nordstrom’s and Saks are seeing flat growth.”  Johnson’s index of “value” retailers has gained 7% year-to-date, with the mid-tier retailer index losing 7.5%.

Changes in shopping habits – primarily among women – are behind this migration.  “Women used to shop on a recreational basis,” Johnson says, “but now they visit malls on the holidays and the occasional weekend.”  With 72% to 78% of women in the workforce (depending on age), they do not have the time to spend shopping at malls.  “When you include the parking, the all-in transaction time is just too much of a hassle,” he says.

“Department stores don’t reflect how women want to shop,” Johnson says.  “When you add in the price factor, they can get what they want at a discount store.  Only when they want unique or designer merchandise do they go to a store like Neiman Marcus.”

The Effect of the Falling Dollar

The dollar’s fall has had a small net negative impact on consumer spending.  “Psychologically, consumers pull back,” Johnson says, although he is quick to add that recent surges in energy prices have a greater impact on buyer behavior.  The prices of some imported consumer goods are moving up, but these are mostly in the luxury categories.  The dollar’s decline, along with energy prices and ethanol growth has contributed to food price increases more than in the last several years. 

Tourism is offsetting these increases.  “When I go to the stores in SoHo [in New York], I am sometimes the only one speaking English,” notes Johnson, adding that foreigners are still seeking bargains in the depressed U.S. dollar, even now in a low tourist season.

If you look at households as a business, a key indicator is their debt service ratio (the percentage of income used to pay principal and interest on mortgage and other debt).  After having risen for many years, it peaked in the fourth quarter of 2006 at just over 14%, and has receded since then.   From a cash flow perspective, the majority of households have gotten healthier in the last year.  “This fact is not widely known,” Johnson says, because it is overshadowed by news of foreclosures and the troubles of consumers caught in the sub-prime crisis.

Tracking the Health of the Economy

To gauge the health of the economy, Johnson pays little attention to the same store “comp” sales that are closely tracked on Wall Street.  These are heavily influenced by retail promotional tactics and store openings and closings.

He is also skeptical of data based on reported earnings relative to analyst forecasts, because he believes management is prone to manage analysts’ expectations to enhance their stock performance.

Instead, Johnson monitors the growth in operating margin and cash flow from operations for the 10-12 largest retailers, tracking this on a year-to-year basis.  In fact, Johnson suggests that the best single proxy for the overall economy is Wal-Mart’s total sales, which represents approximately 9% of the consumer economy.  “Half of American families shop there a couple of times a month,” Johnson notes.

Wal-Mart just reported 8% growth worldwide and 5.8% growth in the US for the month of February.  Considering that one-third of Wal-Mart’s revenue is from      slow-growth groceries, he is optimistic about the path of the economy.  “Once heating bills get digested and paid off, I expect to see improved growth in the economy,” notes Johnson.

Would you like to send this article to a friend?