New Mission, New Website coming soon! Learn more now.

Equities logo
Close this search box.

Consumer Discretionary’s Road to Recovery

After years of the economy trudging back to health the consumer discretionary sector bounced back to strength in 2011. Retail accounts for roughly 70 percent of total spending, prompting

After years of the economy trudging back to health the consumer discretionary sector bounced back to strength in 2011. Retail accounts for roughly 70 percent of total spending, prompting economists to rejoice at the increased spending over the course of the year.

Especially successful this year were those stocks at the either end of the retail spectrum with affordable dollar stores like Dollar Tree (DLTR) and the The 99 Cent Only Store (NDN) breaking out on massive new sales and Saks (SKS) , Nordstroms (JWN) and Macy’s (M) soaring at mid year.

For a certain part of 2011, retail stocks were king, with many subscribing to the notion that the rich are getting richer and the poor are getting poorer. Investors flooded funds into shares of luxury retailers like Tiffany’s (TIF), which has been benefitting from a rise in consumer spending in Asia as well as higher US sales. Since its initial climb, some have argued that Tiffany’s will not have staying power at high levels given much of its new sales growth it from Asia, where the economic growth rate is fading. This has been sentiment suffered by a number of consumer directionally stocks with considerable exposure to the Asian markets. In the last quarter, both Saks and Tiffany’s reversed a considerable amount of the gains they experienced over the year.

Mid-level retailers like Gap (GPS), also suffered as their price points become increasingly unappealing to a disappearing middle class. Much of the improvements in retail seemed polarized, and mid-priced mall stored beyond the Gap suffered the consequences.

What the Lipstick Index Says About The Economy

Another area within consumer discretionary that was expected to rise this year was cosmetics. Talk of the lipstick index, or the idea of people buying minor luxuries like lipsticks during tough times, was rampant early in the year. Some look at the results of high spending in this area as an indication that the rest of the economy will continue to struggle. The fact that sales of lipstick were largely unchanged might have been looked at as an optimistic indicator, but that spending just seemed to shift to another area within cosmetics.

As it turned out, nail polish has replaced lipstick as an inexpensive luxury item, with rapidly rising sales, indicating the 50 percent continue in search of satiating their consumer impulses without serious repercussions.

Teen Retailers on the Decline

Other major events within consumer discretionary this year included the protracted decline in teen retailers. Companies from Wet Seal (WTSLA) to Hot Topic (HOTT) and Aeropostale (ARO) seem to have fallen from the favor of teenagers. The companies have been working to shift their merchandise to appeal more to their audience but the fickle taste of the teen market but it has proven more of a struggle than many assumed. Of the three, Hot Topic seemed to adjust their wares best to appeal to teenagers, improving their sales somewhat and closing the year up over 10 percent.

The Rise in Online Shopping

Other major topics within the sector included the rise of online retailers like Amazon (AMZN) and their impact on certain subsections. E-tailers have proven deft in offering better prices than their brick and mortar counterparts, particularly in the areas of consumer electronics, music and books. Discount plasma TVs and other similar products are often both more affordable and convenient on the internet. The same trajectory occurred with books when Amazon first came on the scene, negatively impacting the performance of the likes of Barnes and Noble (BKS) and Borders. In February of 2011, Borders declared bankruptcy as a result of the sales losses they’ve incurred as a result of the more inexpensive means of acquiring books and music.

Record breaking sales for online retailers on on Black Friday and Cyber Monday seemed to indicate a shift in the way people shop in all areas, though currently, only 8 percent of overall purchases are made online. At least some of the improvements seemed to be the result of general heightened enthusiasm for retail, which rose approximately 5 percent year-over-year this holiday season.

Equities short logo
Equities short logo