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Cheap Gas Is Fueling Retail Sales

7 January 2015 in Trading Ideas

Is it possible all that was needed for a self-sustaining economic boom was two-and-a-half-dollar gas?

Early last month, the government reported that retail sales rose 0.7% in November, the most in eight months, as consumers, buoyed by both falling oil prices and rising employment, were snapping up a variety of goods, notably electronics, clothing and furniture.1

As a Bloomberg report put it, the biggest hiring increase in more than a decade and the lowest gasoline prices in four years are convincing households that the economy’s uptick will be sustained. At the same time, economists were persuaded to raise their forecasts for fourth-quarter GDP.

That confidence by consumers is no small thing – and likely goes a long way to ensure that much of the extra cash in consumers’ pockets doesn’t just stay there.

“The consumer is doing pretty well, Thomas Simons, an economist at Jefferies, told Bloomberg. “Any money consumers are saving from lower gasoline prices is being deployed elsewhere. The broad-based increase in sales is quite encouraging.”

Equally encouraged are discount retailers like Wal-Mart, which in November pointed toward falling oil prices as being a big part of its 0.5% rise in same-store sales in its most recent quarter – a period where it had originally forecast no growth at all.2

Higher sales have contributed to the sector’s higher stock prices. In the past six months, with gas prices falling, the Discount Nation motif has increased 19.4%. In that same time frame, the S&P 500 is up 3.4%.

In the past 12 months, the motif has gained 13.6%; the S&P 500 has risen 12.9%.

How important is cheap gas for discount retailers? As the Wall Street Journal noted, citing economists at Bank of America Merrill Lynch, families with income below $50,000 spent more than a fifth of their after-tax income on energy on average in 2012, compared with about 9% for families who made more than $50,000.

Even more specifically, the average US household has spent $2,600 a year on gasoline in recent years.

Into the new year, average gas prices are already now about 70 cents a gallon lower than they were in mid-November, which could bode well for retail sales numbers in December, at the very least.

According to a recent report by UBS cited by Barron’s, if lower pump prices save households $50 billion over the next year and they spend 80% of this, the result could be an 0.8 or 0.9 percentage point boost to Wal-Mart’s same-store sales gains.3

Good news for Wal-Mart, but not necessarily a game-changer for its stock. Barron’s suggested that investors may see more benefit from a smaller discounter such as Big Lots (like Wal-Mart, a Discount Nation motif component), whose more cheaply valued shares could offer a significant upside if the company’s turnaround plan takes hold while consumers are increasingly more willing to spend.

Regardless of which stock performs better from here, the relative boost in consumer spending power may continue to provide a lift to discount retailers’ sales performance.

1Shobhana Chandra, “Hiring, Cheaper Fuel Give US Retailers a Boost: Economy,” Bloomberg.com, Dec. 11, 2014, http://www.bloomberg.com/news/2014-12-11/retail-sales-in-u-s-climbed-in-november-by-most-in-eight-months.html, (accessed Jan. 5, 2015).

2Shelly Banjo and Michael Calia, “Gasoline Savings Flow to Wal-Mart’s Carts,” wsj.com, Nov. 13, 2014.

3Jack Hough, “Big Lots, Aided by Low Gas Prices, Could Rise 25%,” barrons.com, Dec. 11, 2014.