Retail's biggest losers during oil spikes

Discount retailers lose otu when oil spikes By Mina Kimes, writer


FORTUNE -- An oil spike has a way of making market watchers nervous, and retail investors are no exception. After going on a tear in 2009 and 2010 -- the S&P 500 retail index rose 78% and 37%, respectively, more than doubling the performance of the broader index in both years -- retail stocks have begun to falter. Surging gas prices have cast a pall over the sector, which is up just 0.7% so far this year, while the S&P is up 3.4%.

That's not because the companies themselves have been doing badly. Sales at chain stores that have been open for at least a year rose 4.2% in February, according to the International Council of Shopping Centers (ICSC). Consumer confidence recently hit a three-year high, and the BEA reported that spending on goods last quarter surpassed 2008 levels.

But retail analysts have begun to sound warnings about the danger that high gas prices pose for the sector. In the same report that announced the rise in February sales, the ICSC added that the rising cost of crude was "the big worry" facing consumers and the economy.

"All told, with gasoline prices expected to be up almost 6% in 2011, there is likely to be some pullback in retail sales and consumer spending as a result," wrote J.P Morgan's Charles Grom in a recent note.

It's easy to see why rising gas prices have alarmed investors. When people pay more for fuel, they're less likely to drive to stores. Once they're there, they have less money to spend. Every $1 increase in the price of a gallon of gas lowers consumer spending by $100 billion, according to Deutsche Bank analyst Mike Baker. If gas prices were to stay at $3.47 through the rest of 2011, resulting in a yearlong average of $3.41 -- a $0.67 increase from 2010 -- consumer spending would decline by $67 billion.

Retail sales zig, oil zags

And yet, many of the same analysts that are bemoaning the coming gas spike have also noted that gas prices don't correlate very closely to retail sales. Baker, who wrote that higher fuel costs have reaffirmed his decision to downgrade the retail sector, ran a comparison of gas prices and retail sales over the last decade and found a mere -9% correlation (it's negative because rising gas prices cause sales to fall).

Grom, of J.P. Morgan, crunched the numbers and came up with a -21.9% correlation -- more significant, but much less so than the link between retail sales and employment growth (66.3%) or housing (46.6%).

Given the faint connection between retail sales and fuel costs, it seems strange that analysts are so spooked by soaring gas prices. But a closer look at the numbers shows that, while the average correlation is small, different retailers are impacted in wildly divergent ways.

As it turns out, retailers that make higher-end goods -- consumer electronics vendors, home centers, and office products stores -- actually outperformed when gas prices soared, according to Baker. That's not to say that rising fuel costs generate demand for iPods and lawnmowers, but rather that a boost in gas prices often coincides with economic flush times, when the middle class spends more on discretionary purchases. Some of the top performers in this group were Best Buy (BBY, Fortune 500), Staples (SPLS, Fortune 500), and Home Depot (HD, Fortune 500).

Meanwhile, the companies that were worst off when gas prices were high were value-oriented chains -- Family Dollar (FDO, Fortune 500), Dollar Tree (DLTR, Fortune 500), and 99 Cents Only (NDN). Because those companies' customers tend to be less well off, they spend a larger proportion of their overall budget on gas. As a result, when gas costs go up, their purchasing power goes down.

"The impact is far, far greater for value," says Joel Bines, a managing director in the retail practice of AlixPartners. "You see fewer trips and less purchasing on those trips. For the upper-middle and luxury customer, the impact is muted."

So far during the current oil spike, however, investors don't seem as worried about the retailers at greater risk. Shares of the aforementioned discount chains have all risen since oil prices started spiking in late February, outperforming the overall sector. It may be that investors haven't apprehended the connection -- or, alternately, that they're looking further out. And shares of both Family Dollar and 99 Cents Only have been boosted by buyout offers.

Whatever the case, while discounters may suffer in the short term from rising gas prices, Baker says, they ultimately benefit if fuel stays expensive for several months. In the end, $4 gas sends everyone running to the dollar store. To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Sponsors

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.