The headline growth of 5.5 per cent in February US retail sales suggests a rally. However, the number is a little deceptive as February contained an extra day because of the leap year, which flatters the numbers.
When the extra day is removed, overall retail sales grew by a more modest 1.9 per cent. In volume terms, this translates to a very modest 0.1 per cent growth which remains a long way below the type of uplift at the back end of last year. Notably, January’s growth was also downgraded – moving from a 2 per cent uplift when first reported to a revised 1.4 per cent growth now. Overall, this backs the view that this year has started on a much slower note than last year ended.
From our data, the consumer remains under some pressure with higher debt levels and lower savings than this time last year. However, some progress has been made on paying down at least some of the holiday bills and wage growth is now trending above general inflation, so there has been a small uptick in optimism and sentiment. This is likely why, even when adjusted for the extra trading day, there was a small uptick in volumes during February.
All that said, none of the consumer indicators point to there being a boom in consumer sentiment or spending power over the first part of this year. Moreover, a lot of the gains seem to have been made in foodservice, which suggests consumers continue to prioritize experiences over things when they have a little extra cash to spend.
For core retail – which excludes gasoline, automotive and foodservice – sales grew by 5.5 per cent or by 1.8 per cent when the extra day of trade is removed. The adjusted number suggests that there has been a pullback in spending since last month when core sales grew by 2 per cent. This would also be the lowest rate of growth since April of last year. It underlines the fact that consumers continue to be very careful and cautious in their buying habits and are shopping and spending more modestly, especially in certain categories.
The home sectors continue to feel the most heat from the slowdown. At home improvement stores, sales fell by 1.3 per cent even with the extra day of trade. When this is removed, sales declined by a sharper 3.8 per cent. At furniture and homewares stores, sales fell by a sharp 6.3 per cent and by 8.4 per cent without the additional day.
The weak housing market continues to act as a drag on these categories, but so too does the more expensive finance needed to buy big-ticket products on credit. Confidence in making a big purchase has also not increased at the same pace as general consumer sentiment. Unfortunately, these unfavorable dynamics will not resolve themselves any time soon which means home categories will remain in the doldrums for at least the first half of this year
At apparel stores, sales increased by 4.6 per cent or by a shallower 1.4 per cent when the extra day is removed. Volumes continue to trend positively and have been helped along by consumers refreshing their closets for spring. However, under the main figure there continues to be churn in where people are shopping, with a big pullback from department stores, continued pressure across the mid-market players, and strong share growth at value players including off-price retailers. The reluctance to pay full price remains strong, which is why many clothing retailers are having to discount to stimulate demand. Fortunately, margins currently allow for this as supply chain costs are coming down.
Within the food and grocery segment, sales rose by 4.1 per cent or by 0.5 per cent without the additional day. Even as inflation has come down, volumes remain muted as consumers continue to adjust to the shock of higher prices and look to balance their budgets. There is also continued evidence of trading down to the value segment, which will put more pressure on the mid-market players.
Because of the extra day, February will flatter the year-to-date numbers for some time to come. However, behind the noise it creates, the distinct pattern is of a retail sector that is returning to more modest and normalized rates of growth after a period of elevated demand, partly fueled by inflation. That means gains for individual retailers will be harder to come by and that superior growth will only come from stealing share from other players. This signals a very competitive year ahead.
