In economics, inferior goods are defined as goods that are less in demand as consumers get richer but more in demand as consumers get poorer -- which of course happens when the economy slows down. Inferior goods are often the basic goods and services such as bus rides, potatoes, instant noodles and so on. And with increased demand, the price of such goods, unless regulated, can actually increase in bad times. A recent example of this is the increase in the price of rice (although other forces were at work there as well). Well, recently we've seen a trend in retail that showcases this clearly -- discount retailers have been performing well relative to most other retailers. When retailers reported same-store sales for the month of April, Wal-Mart Stores Inc. (NYSE: WMT), Target Corp. (NYSE: TGT) and Costco (NASDAQ: COST) outdid their less fortunate counterparts as they have likely taken customers away from other retailers.
The trend that started a few months ago, with car sales (definitely a normal, not an inferior good) in the U.S. softening overall, has continued and even deepened as consumers have less disposable income after inflation and gas money is taken into account. With credit hard to come by, they have turned to cheaper alternatives. To wit, today Wal-Mart -- my "inferior retailer" -- reported that first-quarter profits rose 6.9%. Conversely, Liz Claiborne (NYSE: LIZ) -- the "normal retailer" -- swung to a first-quarter net loss.
To be fair though, it's the top line that matters if I'm looking at consumers' changing habits and there WMT saw a net 10.2% sales increase while LIZ's sales grew by much less during the quarter, 4.9% -- actually, not that bad. Even AnnTaylor Stores Corp. (NYSE: ANN) raised its forecast Monday. Indeed, somehow retail -- excluding auto sales of course -- has managed to hold up quite well recently despite market conditions as today's report indicates. Including autos, though, retail sales declined in April.
The question for investors is whether any retail stocks merit our attention right now. Some analysts actually believe so, saying that not only discount retailers like Wal-Mart stand to gain from a weakening economy, but even some department stores like J.C. Penney (NYSE: JCP) which generally have lower prices could do well in the current climate.
I don't know about that. Call me skeptical or careful -- either way, I wouldn't jump on any retail at the moment, not the discount retailers and definitely not the higher-end stuff. I mean, even Wal-Mart had a cautious outlook when reporting today, saying that as consumers wrestle with higher energy and food costs they will likely have even less money for other items. That sent WMT stock over 2% lower. And Liz? Liz has actually posted some improvements, such as a 28% jump in sales of its four "direct" brands, but it's still in the midst of a massive restructuring. LIZ shares are gaining over 1.5% today as the results handily beat expectations. But I still wouldn't touch either stock.
At some point, of course, the economy will rebound and so will retail. The time to get back into this sector will be when the first signs of a recovery appear. But right now, no one is sure when that will happen and the expectation is for at least two more quarters of weak results. I might be missing the boat a little by waiting, but tell you the truth, I'm just a little more risk averse these days.
Before the bell: Futures lower as oil rises, despite Alcoa earnings
Alcoa's Q2 2008 earnings transcript
Sir John Templeton, best contrarian investor of the 20th Century, dies at 95
Reader Comments (Page 1 of 1)
5-13-2008 @ 3:36PM
william lindblad said...
I don't think that the general statement on economist.com intended that food staples be considered inferior. If one were to apply that thinking than you would have to take into consideration the by-products that come from corn,wheat,rice,potatoes,soybeans,peanuts and sugar beets to name a few. If you eliminate just what is on that short list 70% of what you find in a typical grocery store would not be there, including the entire meat section. If you want to compare retail stores it is more a case of price than anything else. The vast majority of the people in the U.S. are dependent on vehicle use to acquire goods and services. The price of fuel has risen some 50-60% in the last 7 months and that, coupled with the rest of the economic conditions are limiting the consumer wallet. As such, the discount stores will fair better. It's simple - frugal is in - luxury is out.
5-13-2008 @ 4:46PM
melly said...
William, you're right, inferior goods don't necessarily mean food staples, but rather goods that their demand increases when income decreases -- they tend to be low priced basic necessities.
It seems that on the rest of it we're in agreement.