Shop Talk

Retailers, consumers and prices

Check Out Line: Bringing back discretionary spending

September 4, 2009

costco-shopperCheck out analysts’ calls on middle and upper income shoppers.

Thursday’s sales reports showed that some consumers have started to buy their little luxuries again, a trend retail industry experts say is crucial for sales to rebound this fall and winter.

Michael Koskuba, Portfolio Manager for Victory Capital Management‘s Victory Large Gap Growth Fund, recommended that investors look into discount names with a discretionary bent, such as Target, which he owns in his fund.

“We thought, well, if things do start to improve they’ll be a beneficiary of that, and clearly we’ve seen the outperformance in the stocks,” Koskuba said of Target shares compared with those of Wal-Mart Stores Inc so far this year.

“The discounters in general, especially the ones that do have the discretionary component to them, I think are the one that will continue to do well,” he said, citing companies such as Target and off-price retailer TJX.  “I think those are sort of the areas that investors should be focusing on.”

Still, low-income consumers alone cannot ensure a retail recovery.

“While we believe market share gains for the discounters are likely to persist as the consumer remains focused on value and as the savings rate remains elevated relative to recent years, we are more positively disposed toward retailers in our coverage addressing the middle-to-upper-income consumer,” said William Blair analyst Mark Miller.

Michael Niemira, chief economist of the International Council of Shopping Centers, said he noticed encouraging trends in Thursday’s reports, such as Costco selling more televisions (albeit at a lower average price).

“You say, well, TV sales are deferrable, but that’s a discretionary purchase.  So there’s something beneath the surface that is, I think, a little bit more positive,” Niemira said. 

He expects a broader group of retailers to start posting positive sales results by the end of the year, and not just because they face easy comparisons since the end of 2008 was so abysmal.

“Even luxury will be participating in that,” Niemira said.  “I don’t think you can have a sustained consumer recovery without the luxury component strengthening.”

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(Reuters photo)

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