Covid crushes retail sales
Bottom line After posting the worst labor market report in history last Friday, the government-mandated closure of nonessential brick-and-mortar stores in April similarly resulted in a nominal 16.4% month-over-month (m/m) decline in retail sales last month. That marks the largest decline since record-keeping began in 1967. This sequential decline was twice as bad as March’s 8.3% m/m nominal drop, when stores were closed for only the back half of the month. So, looking at the full months of March and April 2020 combined, retail sales have plunged by an historic 13.7% from the same 2-month period last year.
Retail haves and have nots To be sure, there is a sharp dividing line between the winners and losers in this coronavirus-impaired battlefield, one that is littered with collateral damage. The winners have a demand for their goods or service. They have a multichannel distribution system—including a combination of a physical building, online sales with home delivery and contact-free curbside pickup. Finally, they have clean balance sheets, without excessive leverage, giving them flexibility to shift course if needed. Examples today include well-managed companies, such as Amazon, Walmart, Target, Costco and Kroger. Among other things, these businesses have hired many more employees and provided protective measures, paid higher wages and given out hazard-pay bonuses.
Alternatively, nonessential stores like Sears, Kmart, J.C. Penney, Lord & Taylor, J.Crew and Neiman Marcus are closed due to government mandate, there’s little demand for their products and they are heavily indebted due to excessive leverage and poor management. Capital is king, and the global pandemic has accelerated the inevitable that, in our view, is pushing these companies and similar stores into bankruptcy.
Disastrous retail sales The Commerce Department reported this morning that nominal retail sales in April were much weaker than expected, plunging 16.4% m/m, compared with consensus expectations for a 12% decline. March was revised to a decline of 8.3% and February was modestly down 0.4%. E-commerce was a clear winner, rising 4.9% in March and 8.4% in April. Clothing, however, plummeted 49% in March and 79% in April.
Retail sales ex-autos plunged 17.2% m/m in April, double the 8.5% expected decrease, compared with declines of 4% in March and 0.5% in February. Motor vehicles and parts fell 25.7% in March and 12.4% in April. Total vehicle sales have plunged by nearly half over the past two months, to 8.58 million annualized units in April from 16.83 million in February. By comparison, car sales troughed at 9 million units in February 2009 at the bottom of the Great Recession.
Retail sales not including autos and gas plummeted 16.2% m/m in April, more than double the 7.6% expected decline, compared with modest drops of 2.6% in March and 0.2% in February. Lagging retail gasoline prices at the pumps fell 32% from a high of $2.60 per gallon in January to $1.77 in April, while crude oil (West Texas Intermediate, or WTI) prices plunged 67% from $63 per barrel in January to $20 at the end of April (although prices briefly fell to -$38 in mid-April). But because of shelter-in-place rules to contain the coronavirus, no one was out on the roads driving, so gasoline volumes plunged along with prices.
Control results, which strip out food, autos, gas and building materials, and feed directly into quarterly GDP, declined by a much worse-than-expected 15.3% m/m in April, which was more than triple the consensus 5% expected decline. That compares with a solid gain of 3.1% in March and a breakeven February. When the government’s social distancing and shelter-in-place rules were first established in March, consumers quickly donned their masks and rubber gloves and rushed to their remaining open, essential stores to hoard groceries, adult beverages, paper goods, cleaning products, office supplies and electronics. But with their freezers and pantries now bursting at the seams, and with local governments beginning to reopen their economies, consumers have dialed back household stocking over the past month.
So when will retail results improve? We’re watching several key metrics closely, and there appears to be a light at the end of the tunnel:
Initial weekly unemployment claims (a leading economic and employment indicator) have risen by a horrific 36.5 million people over the past eight weeks, with many of those self-reporting that they are on temporary furlough. Initial claims peaked in the week that ended March 28 at a record 6.87 million, which was 10 times higher than the previous record at 695,000 claims in October 1982. However, over the past six weeks, initial claims have steadily declined by more than half to 2.98 million for the week ended May 9.
Personal saving rate is now at a near 40-year high of 13.1% in March 2020 (13.2% in November 1981), sharply higher than December 2019’s 7.5%. Socially deprived consumers have enormous pent-up demand and plenty of dry powder to spend.
University of Michigan Consumer Sentiment Index bottomed at a 9-year low of 71.8 in April 2020 (69.9 in December 2011), but it surprisingly rose to 73.7 in May, well above the consensus expectation of 68.
NFIB Small Business Optimism Index fell to a 7-year low of 90.9 in April 2020 (90 in March 2013) from 96.4 in March, but it was well above the more pessimistic consensus of 83 that had been expected.