The Economic Data calendar for the week of the 17th of October through the 21st is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Outerwear apparel sales are ramping several weeks earlier than in years past. Weather? Yes, in part. But we think we’re also seeing the inevitable snap-back in the replacement rate for winter coats – which is perhaps the most discretionary apparel item the average person buys.
Athletic apparel sales appear to have remained at a healthy HSD-LDD run rate in Q3. Breaking the late October trend of old, outerwear sales started to ramp as a percent of sales into the fall beginning in late September; 2-3 weeks earlier than in 2009 & 2010. In 2010, outerwear sales did not accelerate as a percent of athletic apparel sales until the 2nd week of October. In 2011, outerwear ramped to 6% in the third week of September, closed out September at 7% and accounted for 11% of apparel sales in the first week of October compared to 4%, 5% & 9% respectively in 2010.
What’s driving the early outdoor apparel sales? Looking at the heat maps below, the past two weeks have had at least one major US region where temperatures were 3 to 9 degrees cooler than typical seasonal temperatures. When comparing this year’s US climate over the past 2 weeks vs. the same period last year, it was 10-20 degrees cooler out in certain western states during the week ending October 8th (last week). The climate during the week ending October 1st (2 weeks ago) when the ramp in outerwear really began to accelerate compared to the same week in 2010 was virtually unchanged.
Another thing to consider is this... There are roughly 300 million jackets/coats sold in the US each year. Yep, that’s about 1 per person. In reality, it’s not one per person, but rather a smaller portion of the general population getting multiples while the other tail of the distribution gets none. Most notably, the purchase of a coat is one of the most discretionary apparel items you can get. It’s not difficult to stretch out the replacement cycle by 1, 2 or even 3 years.
So, are we seeing stronger outerwear sales due to a tightening of the replacement cycle? Yes, we do. But it’s near impossible to quantify that vs. the impact of cooler and wetter weather.
In the end, this probably won’t budge the number of units sold – as that was determined when they were ordered six months ago. But shifting earlier in the season – even by a few weeks – takes up ASP and margin for the retailers and wholesalers alike.
This could make the outerwear category one of the rare standouts in 4Q in both top line and margins. Who does this help? On the margin it benefits VFC/North Face, Columbia and Dick’s.
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Issues with employment, housing and policy-induced stock market volatility continue to weigh on economic growth and our overall prosperity. Consumer confidence also is a problem, as current levels of confidence indices are more supportive of a recessionary environment than of recovery. Retail sales figures released today certainly imply a healthier consumer in September than the confidence numbers do. If more credence is lent to the sentiment picture, it would seem appropriate to assume that a slowing in spending from here is likely, which would support our bearish view on the economy.
Today, the preliminary University of Michigan consumer sentiment index declined 1.9 points, with consumer expectations leading the way day (although both components declined). The index came in at 57.5, compared with September’s 59.4.
As we have said repeatedly, the economic drivers of confidence remain very mixed, and we do not expect significant improvement any time soon. The most pressing concern is continued labor market weakness, specifically the large number of discouraged workers that remain out of the labor force. This is evident in the chart below, showing the labor force participation rate declining precipitously throughout recent years. This week, jobless claims came in this at 404K (backing out the revision to last week's data, claims moved higher by 3K).
Our Financials Team continues to point out that the spread between claims and the S&P remains as wide as it's ever been in the last three years. If claims move to the level implied by the S&P that would be roughly 475k. Our Financials Team’s model indicates that a 475k claims level would be consistent with 0% GDP growth.
On the positive side, debt levels have been reduced substantially over the past two years and there are small signs that credit is very gradually becoming more available. This, along with the help of the federal government, is helping the outlook for spending on the margin.
It appears from the data that consumer spending finished 3Q11 on a positive note. The Commerce Department reported that retail sales rose 1.1% in September, its largest monthly gain since February 2011. While autos provided a boost to the overall figure, there was strength across the board, as the increase beat the Bloomberg consensus by 0.4%. Non-auto retail sales rose 0.6%, a modest acceleration from August’s 0.5% (was revised up from 0.1% last month).
Despite the disappointing consumer confidence levels, retail sales data suggests that consumers are finding a way to finance consumption despite the weak job and income headwinds. If savings are being sacrificed and this is a significant reason behind the strong numbers this month that clearly doesn’t bode well for the continuation of the improving consumption picture that we saw last month. In the end, the data is prolonging an environment of uncertainty.
Expectations are mounting for a “bazooka” bailout from Europe which, if less substantial than the market is hoping for, could be a catalyst to the downside. Hope is not, after all, an investment process.
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