U.S. Retail: Taxes On Taxes - The Fiscal Cliff & Potential Implications For The Consumer Outlook

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May 18, 2012
Colin McGranahan (Senior Analyst) colin.mcgranahan@bernstein.com +1-212-407-5824
Peter Paskhaver peter.paskhaver@bernstein.com +1-212-823-3955
Peter Choi, CFA peter.choi@bernstein.com +1-212-969-6228
See Disclosure Appendix of this report for important disclosures and analyst certifications.
U.S. Retail: Taxes on Taxes - The Fiscal Cliff & Potential
Implications for the Consumer Outlook
Ticker Rating CUR
17 May 2012
Closing
Price
Target
Price
TTM
Rel.
Perf.
EPS P/E
2011A 2012E 2013E 2011A 2012E 2013E Yield
HD M USD 47.02 49.00 27.5% 2.48 2.89 3.15 19.0 16.3 14.9 2.5%
LOW M USD 28.37 32.00 16.4% 1.69 1.92 2.27 16.8 14.8 12.5 2.0%
BBY M USD 18.44 28.00 -40.5% 3.57 3.66 3.42 5.2 5.0 5.4 3.5%
ODP O USD 2.13 6.00 -49.8% -0.05 0.09 0.28 NM 23.7 7.6 NA
SPLS O USD 13.22 18.00 -30.9% 1.37 1.52 1.71 9.6 8.7 7.7 3.0%
BBBY O USD 69.16 84.00 27.9% 4.06 4.67 5.23 17.0 14.8 13.2 NA
WSM M USD 34.91 39.00 -17.2% 2.25 2.48 2.71 15.5 14.1 12.9 2.5%
AZO M USD 365.58 394.00 31.7% 19.47 23.42 27.83 18.8 15.6 13.1 NA
AAP M USD 68.17 75.00 -0.4% 5.14 5.67 6.47 13.3 12.0 10.5 0.4%
ORLY M USD 94.32 96.00 60.3% 3.86 4.72 5.24 24.4 20.0 18.0 NA
WMT M USD 61.68 68.00 12.9% 4.49 4.87 5.35 13.7 12.7 11.5 2.4%
TGT O USD 54.81 67.00 9.8% 4.26 4.31 4.98 12.9 12.7 11.0 2.2%
COST U USD 83.47 81.00 2.7% 3.30 3.74 4.00 25.3 22.3 20.9 1.2%
DG O USD 45.99 55.00 82.0% 2.35 2.80 3.38 19.6 16.4 13.6 NA
SPX 1304.86 95.92 105.00 118.09 13.6 12.4 11.0 2.2%
O Outperform, M Market-Perform, U Underperform, N Not Rated
* For AZO and COST FY 2011A ends Aug 2012
Highlights
This Research Call is a shorter version of our Retail Monthly Whitebook. The Whitebook will be
available in both hardcopy and electronic copy every other month.
Retail sector rally looks to have run out of gas in May following the robust performance through the
first four months of the year. After four straight months of relative gains to start the year, Retail sector
relative stock performance reversed in May with a -1.6% decline month-to-date (5/17/12). Our equally-
weighted hardlines index fared worse, giving up 690 bps relative so far this month and offsetting the 230
bps outperformance in April. The sector's absolute decline of -8.2% MTD in May also marks the first
decline this year, although the retail stocks' 12.9% YTD absolute return remains a healthy 9.1% ahead of
the broader market. Within our coverage, the weaker overall market and defensive shift impacted our
stocks, with all of our hardlines retailers except BBBY underperforming so far this month, with markedly
weak performance in the office products retailers, auto parts and Best Buy. Our discount retailers have
fared better with all four in our coverage outperforming: DG (+360 bps), WMT (1140 bps), TGT (130
bps) and COST (130 bps). From here, we expect the combination of the relative gains already realized
YTD, somewhat elevated valuations, more mixed fundamentals, and potential for growing concerns
around the outlook and fiscal cliff into 2013 to weigh on further relative gains.
Fundamentally, consumer spending and retail sales remain stable and reasonably well-balanced,
although general macro data are more mixed and weather impact could reverse for next few months.
Overall consumer spending growth has remained remarkably stable in the 4%-4.5% range for the past six
months (average=4.3%) and even for much of the past year and a half (average=4.5%), although there is
a moderately decelerating trend evident in the past few months Exhibit 20. As we noted last year, the
contribution from "other income" (largely proprietors', dividend and rental income) has been waning
For the exclusive use of WLL CHO at ALKEON CAPTAL on 19-May-2012
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(Exhibit 17), but a moderately declining savings rate has offset much of the impact (Exhibit 24). In
March (most recent data available), the savings rate ticked up for the first time in several months,
resulting in 4.0% growth in PCE, the lowest year/year rate of growth since August 2010. Core retail
sales have also shown strong consistency, with year/year growth averaging a solid 5.8% over the past
year and ranging narrowly from 5%-6% with the April retail data continuing this trend. While the retail
and consumer data point to a stable environment, and we continue to expect low-4% growth in PCE and
5%-6%growth in core retail sales for 2012 as a whole, other macro data are more mixed, with payroll
growth slowing in recent months, consumer confidence struggling, the savings rate ticking up, and wage
and salary growth slowing (Exhibit 36, Exhibit 34, Exhibit 24, Exhibit 15). For consumer wallets, May
looks likely to mark a turning point at the pump as gasoline prices while still quite high at an average of
~$3.90 a gallon should be lower year/year (May 2011 averaged $3.96); of note, the last year/year
decline occurred in October 2009. The value of any decline will be small and shouldn't have any
material impact, but this does stabilize or even modestly reverse what had been a persistent drag,
especially for lower income cohorts. Finally, as April retail sales growth demonstrated, the favorable
impact from weather earlier in the year is likely to have some payback as pull-forward of demand works
through over the next few months. We think retail sales growth might show some weakness through the
summer, which could also dampen stock performance into 2H12.
Looming tax / fiscal cliff is a source of significant uncertainty for the consumer outlook into 2013, but
that uncertainty alone could present a hurdle to retail sector stocks in 2H12. While investor focus has
not yet turned firmly toward 2013, there is beginning to be some concern over the outlook into the
second half given the uncertainty around tax policies at the end of 2012. Our Charts of the Month
explore the looming fiscal cliff as multiple tax cuts, deductions, and credits expire at the end of the year
along with new tax increases from the healthcare law. Although it is highly unlikely that the law will
remain as it stands now, the resounding lack of bipartisanship in Congress makes handicapping different
scenarios a challenge, and the worst case outcome would have a very significant impact on consumer
spending in 2013. In total, the effect on the fiscal budget ranges from ~$350B to ~$450B, which would
equate to 2.6% to 3.4% of personal income (Exhibit 1), not including a potential additional impact of
~$100B from the 2011 Budget Control Act (i.e. expense sequester), which we expect would have more of
a medium-term impact. Translating the budget effects to consumer spending is also a challenge, given
different multiplier effects and varying propensity to consumer by income level. Based on our
assumptions, the law as it stands could impact total consumer spending (PCE) by ~1.5% to 4%
(excluding sequester) (Exhibit 3). For perspective, consumer spending growth has averaged 4.2% for the
last three months, directly in line with our 4.2% forecast for 2012 as a whole. As such, assuming a stable
economy in 2013 (i.e. no indirect effects from the fiscal cliff), total PCE growth could be substantially
erased. In this scenario, retail sales growth would likely turn negative given retail's more discretionary
nature. While the whole exercise of predicting the effect of 41 tax provision redefines the word
"imprecise", it is relatively clear that if Congress does not act and this scenario does occur (highly
unlikely, we think), the short term effect on the economy, consumer spending and retail sales growth
would be quite significant. However, it also seems clear that the retail stocks to date have been
discounting little to no probability of any negative outcome. Growing uncertainty alone seems likely to
weigh on the potential for continued relative outperformance in 2H12.
Investment Conclusion
Retail sector stock performance turned negative in the past month, following robust relative gains in the
first quarter of the year. Consumer and retail sector fundamentals remain stable and solid, although other
macro data are more mixed, and payroll and wage growth deceleration is a growing cause for concern.
Warm weather may have benefited weather-sensitive sectors during the winter and early spring, potentially
pulling forward some of the demand from the coming months and foreshadowing slower growth in the next
few months. Looking ahead, the looming tax and fiscal cliff is likely to increase uncertainty around the
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consumer outlook into second half. While the law as it stands would have a very significant negative
impact on consumer spending and retail sales in 2013, we do expect some compromise solution. However,
heightened uncertainty alone could present a hurdle to retail sector stocks in 2H12 following the strong start
to the year and given that the retail stocks to date have been discounting little to no probability of any
negative outcome.
We continue to expect the broad retail sector to struggle to outperform the market for 2012 as a whole, and
continue to think that selectivity and stock selection within the group will be key. We continue to prefer
more resilient growth stocks, which while trading at fuller valuation levels should still delivery solid to
strong earnings growth with limited to no dependence on margin expansion.
Within our coverage, we rate DG, BBBY, ODP, SPLS and TGT outperform and COST underperform with
market-perform ratings on HD, LOW, BBY, WSM, AAP, ORLY, AZO, and WMT.
Details
Charts of the Month
Our Charts of the Month explore the looming fiscal cliff at the end of 2012. In addition to multiple tax cuts,
deductions and credits that expire at the end of this year, tax increases from the new healthcare law are also
scheduled to go into effect. Over 41 tax provisions expire at the end of the year according to the Joint
Committee on Taxation. Although it is highly unlikely that the law will remain as it stands now (i.e. without
all of the expiring benefits), given the resounding lack of bipartisanship in Congress, handicapping different
scenarios is a challenge, and the worst case outcome would have a very significant impact on consumer
spending in 2013.
The process of estimating the effect of taxes on total consumer spending or overall output is highly
imprecise (at best) as even the direct effect on the budget generates significant disagreement. We
aggregated multiple estimates of the effects of tax expiration/increases to adjust for comparability in time
and within different tax categories (e.g. to align years or to split a combined reported number into different
categories of tax).
1
Overall, the effect on the fiscal budget ranges from ~$350B to ~$450B, which would equate to 2.6% to
3.4% of personal income (Exhibit 1). This range does not include any additional impact from the 2011
Budget Control Act (i.e. expense sequester), which would also be activated at the end of 2012. We would
expect that many of the budget cuts might have a more medium-term effect on consumer spending, but
these cuts could still be worth another ~$100B in budget effect.
Predicting the consequence of the decline in disposable income on consumer spending (PCE) is even more
complicated, as such a projection requires an estimate of the multiplier effect as well as the marginal
propensity to consume for the different types of taxes. In economic theory, each dollar of a tax cut is spent
more than once, thus increasing the effect on the economy. However, this effect is significantly offset by
the marginal propensity to consume, where each marginal dollar may only be partially consumed in each
successive spending of that dollar with some portion of extra income added to savings
2
. The marginal
propensity to consume is usually lower for the upper income consumers
3
due to some degree of diminishing
returns to spending (i.e. they are more likely to satisfy a certain level of basic wants resulting in less need to
1
In particular, we've assumed that roughly half of the estimate from the Committee for a Responsible Budget (whose
original estimate was for the two year period of FY13-14) is equivalent to CY13. In addition, the Joint Committee on
Taxation estimate is a two-year forward estimate from the prior fiscal negotiation in 2010.
2
For example, the first consumer with the new tax cut will spend $80 (revenue for the second consumer) and save
$20, the second consumer may then spend $60 out of the $80 in revenue and so on.
3
The MPC also varies by monetary policy adding another layer of complexity
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spend), and fewer credit/liquidity constraints (easier to borrow for higher income consumer), implying that
a tax increase to a higher income consumer is less likely to negatively impact spending in the shorter term.
We review and roughly rate each of the expiring tax cuts as well as the healthcare tax increase based on
which income level they skew towards using data from the Joint Committee on Taxation (Exhibit 2), CBO
estimates, as well as common sense (e.g. 10% bracket elimination mostly affects the lower income-level
population). We then apply multipliers based on CBO estimates (which themselves have changed over
time) of the short term tax cut effects
4
from the original stimulus to the effect on disposable income.
Our estimate of the impact to PCE ranges from ~1.5% to 4% and on output from ~1% to 3% (excluding
sequester) (Exhibit 3), roughly in line with the CBO estimate of 1.5% - 3.5%
5
(including sequester). For
perspective, consumer spending growth has averaged 4.2% for the last three months, directly in line with
our 4.2% forecast for 2012 as a whole. As such, assuming stable economy in 2013 (i.e. no indirect effects
from the fiscal cliff) total PCE growth could be substantially erased. In this scenario, retail sales growth
would likely turn negative given retail's more discretionary nature.
While the whole exercise of predicting the effect of 41 tax provision expirations on output and spending
redefines the word "imprecise", it is relatively clear that if Congress does not act and this scenario does
occur (highly unlikely, we think), the short term effect on the economy, consumer spending and retail sales
growth would be quite significant.
However, it also seems clear that the retail stocks to date have been discounting little to no probability
of any negative outcome. Growing uncertainty alone seems likely to weigh on the potential for continued
relative outperformance in 2H12.
4
Based on CBO's May 2011 "Estimated Impact of the American Recovery and Reinvestment Act on Employment and
Economic Output from January 2011 Through March 2011" report
5
CBO "The Budget and Economic Outlook An Update", Aug 2011
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Exhibit 1
There is some disagreement as to the effect of tax policies on the fiscal budget, but estimates look to be around
~$350B to ~$450B
Source: Committee for a Responsible Budget, Heritage Foundation, Joint Committee on Taxation, CBO, Congressional Research Service (Library of Congress),
Bernstein Analysis
Notes: Heritage foundation College Tax Credit and EIC Expansion estimated from Stimulus tax cost estimate; Congressional Research Service (CRS) Payroll Tax is
an estimate based on average of the other estimates (i.e. not actually reported by CRS); Joint Committee on Taxation "other" includes only the "other" spending
amount greater than $500M; Obama healthcare related tax increases includes the 3.8% tax on unearned income for higher income levels and the 0.9% tax increase
on earned income.
Estimated of Budget Effects of Tax Expiration and Increases in 2013
CFRB: Assumed
Roughly Half of
FY13-14 2yr
projection for CY
2013 only ($B)
Heritage
Foundation: 2013
Tax Increase ($B)
Joint
Committee on
Taxation in
2010 for 2012
Congressional
Research
Service
Increase in Tax Rates $48 $56 $50
10% Bracket Elimination $40 $37 $45
Increase in cap gains and dividend taxes $13 $29 $16
Itemized deductions (PEP and Pease) $10 $9 $10
Child Tax Credit $25 $6 $36
Expiration of reductions in marriage penalties $5 $17 $9
Estate Tax Increase $18 $13 $28
College Tax Credit $8 $12 $9
Earned Income Credit Expansion Expiration $5 $8 $8
Other $3 $12 $12
Expiration of 2001/03/10 Tax Cuts $173 $199 $222
Alternative Minimum Tax Patch $113 $119 $68 $241
Payroll Tax/Unemployment benefits $75 $125 $66 $92
Tax Expiration $360 $443 $355 $333
Doc Fixes $15 $19
Total Tax Expiration $375
Sequester Activation $80
Obama Healthcare related tax increases $23
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Exhibit 2
Tax deductions differ in their effect on various income levels implying a different effect on spending as higher income
levels have a lower marginal propensity to consume
Source: Joint Committee on Taxation, Bernstein Analysis
Note: the above is a sample from the Joint Committee on Taxation Jan. 17 2012 report "Estimates of Federal Tax Expenditures for Fiscal years 2011-2015"
Exhibit 3
We approximate the fiscal cliff to have a sizeable effect of 1% - 3% of GDP and ~1.5% - 4% of PCE in 2013
Source: Committee for a Responsible Budget, Heritage Foundation, Joint Committee on Taxation, CBO, Bernstein Analysis
Tax Expenditure Amount ($M) by 2010 Income at 2010 rates
Adjusted Gross
Income Class (2010)
Medical Deduction
State and Local
Income Sales and
Personal Tax
Deduction
Child Care Credit
Earned Income
Credit
Child Tax Credit
<$10,000 NA NA NA $7,192 $1,195
$10,000 - $20,000 $23 $7 $154 $20,871 $5,748
$20,000 - $30,000 $86 $41 $710 $15,125 $6,498
$30,000 - $40,000 $212 $147 $719 $9,620 $6,483
$40,000 - $50,000 $458 $340 $541 $5,034 $5,913
$50,000 - $75,000 $1,768 $2,042 $1,261 $2,761 $11,337
$75,000 - $100,000 $1,961 $3,093 $1,091 $122 $8,195
$100,000 - $200,000 $3,452 $14,316 $1,543 $4 $10,591
$200,000+ $933 $19,409 $322 NA $25
Effect of expiring tax deductions and healthcare law tax increases on 2013 Output or Spending
A B C= (A+B)/2 D E CxD = F CxE = G F/GDP G/GDP F/PCE G/PCE
Decrease in
Disposable
Income
Low
Estimate
Decrease in
Disposable
Income
High
Estimate
Average
Distribution
of Incomes
Affected
(skews
towards)
Output/
Spending
Multipliers
Low
Estimate
Output/
Spending
Multipliers
High
Estimate
Effect on
Output or
Spending
Low
Estimate
Effect on
Output or
Spending
High
Estimate
% of
2013E
GDP -
Low
% of
2013E
GDP -
High
% of
2013E
PCE -
Low
% of
2013E
PCE -
High
Increase in Tax Rates $48 $56 $52 High 0.2 0.6 $10 $31 0.1% 0.2% 0.1% 0.3%
10% Bracket Elimination $37 $45 $41 Low 0.6 1.5 $25 $61 0.2% 0.4% 0.2% 0.5%
Increase in cap gains and div taxes $13 $29 $21 High 0.2 0.6 $4 $12 0.0% 0.1% 0.0% 0.1%
Itemized deduct. (PEP and Pease) $9 $10 $10 High 0.2 0.6 $2 $6 0.0% 0.0% 0.0% 0.1%
Child Tax Credit $6 $36 $21 Medium 1.0 1 $21 $21 0.1% 0.1% 0.2% 0.2%
Reduced marriage penalties expire $5 $17 $11 Medium 1.0 1 $11 $11 0.1% 0.1% 0.1% 0.1%
Estate Tax Increase $13 $28 $21 High 0.2 0.6 $4 $12 0.0% 0.1% 0.0% 0.1%
College Tax Credit $8 $12 $10 Low 0.8 2.1 $8 $21 0.0% 0.1% 0.1% 0.2%
EIC Expansion expire $5 $8 $6 Low 0.8 2.1 $5 $13 0.0% 0.1% 0.0% 0.1%
Other $3 $12 $7 Medium 1.0 1 $7 $7 0.0% 0.0% 0.1% 0.1%
Expiration of 2001/03/10 Tax Cuts $145 $253 $199 $97 $196 0.6% 1.2% 0.9% 1.7%
Alternative Minimum Tax Patch $68 $119 $93 Medium 0.2 0.6 $19 $56 0.1% 0.4% 0.2% 0.5%
Payroll Tax/Unemployment benefits $66 $125 $96
Low to
Medium
0.8 2.1 $76 $201 0.5% 1.3% 0.7% 1.8%
Tax Expiration $279 $497 $388 $192 $453 1.2% 2.9% 1.7% 4.0%
Obama Healthcare tax increases 21.3 $23 $22 High 0.2 0.6 $4 $13 0.0% 0.1% 0.0% 0.1%
Tax expiration and increases $300 $520 $410 0.5 $197 $466 1.2% 2.9% 1.7% 4.1%
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Hardlines Retail. Our hardlines coverage outperformed the broader market in April by 3.3pp on a market-
cap weighted basis and by 2.3pp on an equal-weighted basis. Performance was strongest for ORLY, rising
by 15.5% on an absolute basis, due to impressive Q1 results with robust topline growth partially helped by
weather demand pull-forward, although the sector traded down after AZO's disappointing earnings in May.
The discounters had mixed performance with WMT (although trading up after earnings in May) and COST
underperforming, DG outperforming and TGT mostly flat despite strong comp growth.
In the Home Improvement sector, Home Depot rose by 2.9%(3.7 ppts outperformance) while Lowe's rose
by 0.3% (1.0 ppts outperformance), reflecting some optimismin housing market trends as well as a weather
tailwind. However, Home Depot's Q1 performance was below expectations despite demand pull-forward
and help from weather as non-weather sensitive categories were more in line with prevailing trends. The
stock has traded down MTD. However, we believe that home improvement demand growth will remain
constrained by continued weakness in larger ticket discretionary purchases. HD continues to benefit from
stronger topline momentum, including Q4 U.S. comps up 5.7% versus 3.4% for LOW. LOW has recently
stepped up its pace of organizational change, although we believe that much of the performance gap is
driven by HD's own company-specific improvements. While cost reduction initiatives appear sensible, we
see some risk that LOW's merchandising initiatives may be attempting too much. Both HD and LOW
valuation appears full, although LOWis relatively more attractive. However, LOW's pace and intensity of
organizational change increases the risk in the stock and, we believe, a cautious approach is required. In the
shorter term we view guidance and demand pull forward as important factors in driving the HI stocks.
Longer term, we expect the stocks to continue to be largely driven by anticipations surrounding the pace of
the recovery in home improvement spending.
Among our Home Furnishings retailers, Bed Bath & Beyond rose by 7.0% (7.8 ppts outperformance), while
Williams-Sonoma increased by 3.2% (4.0 ppts outperformance). Home Furnishings were helped by
relatively mild winter weather with HF trends improving significantly. BBBY's acquisition of Cost Plus and
subsequent upgrades by the Street helped drive the stock. BBBY is characterized by a more stable growth
profile (including contributions from category innovation, Harmon conversions, and new store growth) and
a reasonable valuation ex-cash.
Within the Consumer Electronics (CE) retail sector, Best Buy's stock fell by -6.8%, underperforming the
market by 6.0 ppts. After reporting disappointing Q4 results in March, the company announced the surprise
resignation of CEO Brian Dunn, and the company is now operating under an interim CEO as it undergoes a
search. Despite the leadership transition, we expect that the recently announced strategic plan will remain
largely intact. In addition, company guidance and industry data points indicate that sector demand will
remain quite challenging, particularly in the first half. While BBY's current valuation appears quite
depressed, we see persistent structural issues that we believe will result in a continued depressed valuation
and limited earnings growth.
The Office Supply Superstores (OSS) underperformed in April as SPLS declined by -4.9% (4.1 ppts
underperformance) and ODP fell by -11.9% (11.1 ppts outperformance). Both stocks suffered as recent
employment data indicated waning momentum following the strong start to the year. SPLS and ODP have
sold off further in May after reporting Q1 results that suggested no topline acceleration, plus moderating
benefits from profit initiatives for ODP and lack of management initiatives for SPLS. Still, recent results
for both companies have demonstrated their ability to manage North American profitability in a largely
static market, and we view valuations as depressed and attractive over longer-term horizons. In addition,
continued improvement in white collar employment has the potential to drive accelerating topline trends
over the course of the year.
The auto parts retailers AZO (+6.6%, 7.3 ppts outperformance), AAP (+3.6%, 4.4 ppts outperformance),
and ORLY (+15.5%, 16.2 ppts outperformance) as the market shifted to a more defensive posture and
industry fundamentals remained solid. However, AAP's Q1 disappointed on both the top and bottom line as
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April sales trends experienced a slowdown versus a tough compare, with the stock significantly falling off
after earnings. ORLY reported strong Q1 results with solid growth on both the retail and commercial side,
although the unseasonably warm winter also appeared to pull-forward seasonal demand. Weather
comparisons will become significantly more challenging during the summer, and we also expect demand
tailwinds from an aging vehicle fleet to wane as new car sales continue to recover. We view valuations as
generally rich, with the stocks now discounting solid secular trends despite the prospect for waning
defensive benefits.
Discount Retail. Despite the market's defensive shift, the discounters under our coverage had mixed
performance versus the -0.7% decline for the S&P 500. Wal-Mart (+-3.7%) underperformed the market by
3.0 ppts as the stock sold off after a New York Times article cited alleged FCPA violations by the Mexican
business in the middle part of the last decade. However, the stock recovered some of those losses after
earnings in May as the implications for current fundamentals and senior management appear to be limited.
Target declined by -0.6% (0.2 ppts outperformance) despite reporting strong 7.3% comp growth for March.
Some of this may have reflected anticipation of weather pull-forward, as Target reported softer 1.1% comp
growth for April. However, we believe that underlying momentum remains solid, particularly with the
"REDFresh" initiatives contributing 2.5%-3.0% to overall comp growth in FY12. We continue to believe
the stock is over-discounting the company's near-term earnings headwinds, and believe TGT will represent
compelling value over a longer-term horizon as Canada begins to ramp and the core U.S. business continues
to grow. Costco declined by -2.9% (2.1 ppts underperformance) as U.S. comp growth unexpectedly
decelerated in March. However, we believe the market is overestimating retail margin trends given the
likelihood of price reinvestment in a value-driven retail environment, and the inherent lack of expense
leverage in the company's warehouse club model. Dollar General's stock rose by 2.7% (3.5 ppts
outperformance), and we remain confident in DG's growth profile, given its defensive positioning, ample
runway for future growth, and reasonable forward valuation.
Consensus Expectations. Consensus expectations for retail sales EPS growth increased to 12.7% from
11.9%as expectations of revenue growth remained the same while margin and buyback expectations
improved. The increase in margin expectations was driven by Home Furnishings, Department stores, and
Apparel and likely reflects the easing of cotton driven margin pressure. Of note, CE EPS growth
expectations decreased significantly from13.1% to 11.6% with most of the decline driven by margin
expectations. Home Improvement expectations improved as weather and improving trends likely helped.
Finally, Home Furnishings expectation also increased as solid channel sales, margin and buyback
expectations helped (See Exhibits 4 and 5).
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Exhibit 4
2012 Consensus Expectations for Retail Sales, Margin and Earnings as of May 2012
Source: FactSet, Bernstein Analysis
Exhibit 5
2012 Consensus Expectations for Retail Sales, Margin and Earnings as of April 2012
Source: FactSet, Bernstein Analysis
Retail Sales. Retail sales ex-autos increased 0.1% m/m in April, below +0.2% consensus, and decelerating
from the strong growth rates during the winter. Total retail sales including autos increased by 0.1% in April,
in line with consensus. Excluding autos and gas stations, ("Core") retail sales were up 0.1%, representing
relatively weak growth given the easy compare in April 2011. March total retail sales growth rates were
revised downwards by 0.1% (to 0.7%) with no revisions for February. Results were likely affected by
demand being pulled forward due to the unseasonably mild February and March Year-over-year sales
6.6%
8.7%
(0.3%)
3.6%
6.1%
3.5%
8.0%
6.0%
3.3%
5.3%
7.8%
-0.4%
0.1%
4.0%
-4.3%
4.3%
4.2%
-0.5%
8.3%
1.8%
6.7%
5.6%
11.7%
7.5%
5.1%
8.1%
4.0%
3.3%
2.0%
5.6%
-10%
-5%
0%
5%
10%
15%
20%
25%
Apparel Automotive Computer &
Electronics
Department
Stores
General
Merchandise
Stores
Home
Improvement
Home
Furnishings
Hypermarkets
& Super
Centers
Specialty
Stores
Total
2012 Consensus EPS Expectations
Sales Growth Net Margin Growth Share Buyback Contribution
11.6% 15.1%
EPS Growth
6.9% 15.8% 16.2% 8.8% 13.6% 12.7% 21.0% 13.9%
5.8%
7.8%
0.4%
3.9%
6.2%
3.2%
7.1%
5.8%
3.3%
5.1%
5.8%
-1.2%
0.8%
3.1%
-4.3%
3.3%
1.2%
-0.4%
7.9%
1.2%
6.6%
5.5%
11.9%
7.5%
5.1%
8.0% 3.8% 3.3%
2.0%
5.6%
-10%
-5%
0%
5%
10%
15%
20%
Apparel Automotive Computer &
Electronics
Department
Stores
General
Merchandise
Stores
Home
Improvement
Home
Furnishings
Hypermarkets
& Super
Centers
Specialty
Stores
Total
2012 Consensus EPS Expectations
Sales Growth Net Margin Growth Share Buyback Contribution
13.1% 14.6%
EPS Growth
7.0% 14.5% 12.2% 8.8% 13.2% 11.9% 18.1% 12.1%
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10
trends remained healthy, (up +6.4% overall and +6.0% in core retail), aided by building materials, home
furnishings, non-store retailers, autos, and food service (Exhibit 6).
Exhibit 6
Monthly Retail and Food Services Sales (Year-Over-Year Growth)
Source: U.S. Bureau of the Census, Bernstein analysis.
Trends improved somewhat for larger ticket discretionary purchases. Electronics and Appliance stores
improved to a still sluggish 1.7% YoY growth (and previous month's growth of -3.1% revised upward to
-0.5% YoY), and still reflecting the lackluster product cycle and migration of electronic sales online.
Furniture and Home Furnishings continued its strong growth with 7.6% year-over-year likely reflecting
easy compares last year as well as overall improving sector trends. Finally, auto sales remained solid as
well, increasing 8.6% YoY in April despite difficult compares last year.
Building Materials and Garden YoY trends were again very impressive with a +10.3% April growth but
weaker (-1.8%) on MoM basis reflecting the pull forward in demand from April to prior months. Gas
stations saw decelerating, growth of 5.5% YoY as decelerating gas prices slowed channel sales. Non-store
retailers continued their strong rise with 1.1% growth (and 11.0% YoY). Food and Beverage Stores
decelerated to a solid 3.2% YoY growth, as the benefit from food inflation wanes (+3.0% in April). Food
Service and Drinking Places experienced solid growth MoM (0.4% in April) and YoY (8.6%) as warm
weather, and easy compares likely helped.
Overall, core results continued to be strong and pointed to a benefit from mild weather as well as easy
compares from last year's cold April weather.
6.4%
5.9%
6.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12
Retail and Food Services Sales Retail and Food Services Sales (Excl. Autos)
Core Retail Sales (Excl. Autos and Gasoline Stations)
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Exhibit 7
Growth in Monthly Retail Sales
Exhibit 8
Food Service & Drinking Places Sales
Consumer and Producer Prices. Headline CPI increased 2.3% year-over-year in April, moderating from
the peak of 3.9% in September. Headline inflation was flat on a month-over-month seasonally adjusted
basis, and slightly lower than the growth in the past three months. The overall energy CPI declined a
Growth in Monthly Retail Sales
Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12
Year-Over-Year Growth
Retail & Food Services 7.2% 7.8% 8.7% 8.9% 8.1% 8.5% 8.0% 7.5% 6.8% 6.6% 6.8% 6.6% 6.4%
Excl. Autos 6.5 7.8 8.4 8.9 8.5 8.2 8.1 7.3 6.1 6.7 6.8 6.4 5.9
Core Retail (Excl. Autos and Gas) 4.7 5.7 6.3 6.8 6.4 6.5 6.8 6.1 5.8 6.5 6.2 6.3 6.0
Furniture & Home Furnishing Stores 0.5 0.2 0.7 0.9 1.5 3.1 3.8 4.3 7.0 11.3 8.4 4.9 7.6
Electronics & Appliance Stores 0.4 (0.8) (2.3) 0.4 1.5 (0.9) 5.5 5.5 0.1 1.4 0.4 (0.5) 1.7
Building Materials Dealers (5.5) 3.1 6.0 6.1 7.5 6.5 5.8 5.8 7.0 11.4 12.6 13.7 10.3
Food & Beverage Stores 6.0 5.6 6.6 7.7 6.3 5.7 5.9 5.1 4.3 4.3 3.5 4.1 3.2
Clothing & Accessories Stores 5.7 5.9 7.8 7.3 5.9 8.7 5.2 3.7 6.7 6.6 8.4 6.9 5.4
General Merchandise Stores 3.7 3.5 4.3 4.5 3.9 5.1 4.4 2.8 3.6 5.2 3.0 3.6 2.6
Food Service & Drinking Places 4.4 5.6 6.2 5.7 5.3 6.4 7.2 6.7 7.1 9.3 7.8 7.4 8.6
Gasoline Stations 19.0 22.3 23.4 24.2 23.5 19.9 16.6 15.5 8.5 8.3 10.1 7.4 5.5
Sporting Goods & Hobby Shops 4.3 4.3 4.0 2.7 5.4 6.4 5.0 1.5 0.5 5.3 5.6 5.7 7.2
Health & Personal Care Stores (5.5) 3.1 6.0 6.1 7.5 6.5 5.8 5.8 7.0 11.4 12.6 13.7 10.3
Nonstore Retailers 16.2 16.4 15.4 17.3 15.7 14.1 18.1 18.3 14.0 8.0 11.4 11.4 11.0
Miscellaneous Retailers 6.6 5.4 5.4 9.1 9.7 7.3 5.2 6.2 3.6 9.6 8.5 9.9 8.5
Two-Year Average
Retail & Food Services 7.5% 6.9% 6.5% 6.6% 5.5% 7.5% 7.6% 7.1% 6.9% 7.2% 7.7% 7.0% 6.8%
Excl. Autos 6.4 6.2 5.9 6.2 6.0 6.2 6.7 6.2 5.7 6.3 6.4 6.4 6.2
Core Retail (Excl. Autos and Gas) 4.2 4.2 4.6 4.8 4.9 5.2 5.7 5.5 5.2 5.8 5.6 5.5 5.3
Furniture & Home Furnishing Stores 1.2 0.7 0.8 1.3 2.3 2.8 3.0 3.0 3.6 5.1 3.6 3.3 4.1
Electronics & Appliance Stores 1.4 1.7 1.0 2.6 2.3 1.8 4.7 1.9 0.8 0.4 (0.9) 1.4 1.0
Building Materials Dealers 0.8 0.6 1.7 2.3 3.6 4.0 6.8 5.4 7.0 8.5 8.6 7.3 2.4
Food & Beverage Stores 4.2 3.7 4.0 4.4 4.3 4.0 4.4 4.1 3.4 4.2 3.5 4.1 4.6
Clothing & Accessories Stores 5.5 4.8 6.2 5.6 4.4 5.7 4.8 5.9 6.2 5.7 7.0 5.4 5.6
General Merchandise Stores 3.4 2.8 3.5 3.7 3.3 3.7 3.0 3.7 3.0 3.3 2.4 2.9 3.1
Food Service & Drinking Places 3.6 4.2 4.7 4.5 4.8 5.8 6.2 5.8 6.1 7.2 6.4 6.5 6.5
Gasoline Stations 24.0 21.0 15.4 16.3 13.8 13.5 13.8 11.0 9.1 9.7 11.8 12.2 12.2
Sporting Goods & Hobby Shops 1.2 2.4 2.5 1.7 2.1 3.2 3.8 3.9 1.6 3.4 5.5 5.1 5.7
Health & Personal Care Stores 0.8 0.6 1.7 2.3 3.6 4.0 6.8 5.4 7.0 8.5 8.6 7.3 2.4
Nonstore Retailers 12.8 13.1 12.5 12.3 12.6 12.5 13.9 14.1 12.7 11.8 13.1 12.9 13.6
Miscellaneous Retailers 3.3 4.6 5.2 6.6 7.1 7.1 6.8 6.3 4.5 8.2 9.9 6.9 7.5
5.9%
8.6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12
Retail and Food Services Sales (Excl. Autos) Food Service & Drinking Places
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significant -1.7% month-over-month in April as gas prices subsided. The pace of food inflation slowed to
3.3% in April from previous month's 3.6% as commodities costs roll over.
Core CPI rose 2.3% year-over-year in April and 0.2% sequentially, in line with the growth rates over the
past few months. Core inflation rose in the fall of 2011 and is now slightly above the 15-year average of
2.1%. On a sequential basis all categories except transportation, recreation and energy posted gains in April.
Producer prices (finished goods) were down -0.3% month-over-month in April following a slight decline
in March. The finished energy component declined by -1.4% in April after the -1.0% decline in March. The
index for finished goods less foods and energy grew by 0.2%, following 18 consecutive months of
increases.
From July 2007 through September 2009, producer prices outpaced consumer prices, a positive trend for
consumers but a potential driver of margin pressure for retailers. The subsequent trend reversed in the last
few months of 2009 likely helped by lean inventory and generally less aggressive mark-downs at Retail.
Trends were also likely supported by a return to positive demand trends. However, the spread between
consumer and producer prices has since returned to the predominant pattern registered over the last several
years, with PPI outpacing CPI, which could lead to margin pressure down the road. The spread still has not
reached the levels seen in late 2008/early 2009 and has been relatively range-bound at -1.0 to -1.5 pp.
Exhibit 9
Consumer Price Index
Exhibit 10
Producer Price Index
Source: U.S. Bureau of Labor Statistics, Bernstein analysis. Source: U.S. Bureau of Labor Statistics, Bernstein analysis.
2.3%
2.3%
0%
1%
2%
3%
4%
5%
D
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0
9
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1
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Core CPI Urban
Total CPI Urban
1.8%
3.3%
0%
2%
4%
6%
8%
10%
D
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0
9
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Total PPI Fi ni shed
Consumer Goods
Core PPI Fi nished
Consumer Goods
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Exhibit 11
Core CPI Core PPI Spread
Exhibit 12
Major Consumer Price Index Components
Food-at-home CPI has steadily posted y/y increases since the deflationary trends seen in the last half of
2009 and first few months of 2010. Since the relative inflation rates of food-away-from-home and food-at-
home converged in September 2010, food-at-home CPI (3.3% y/y growth in April) has outpaced food-
away-from-home CPI, which rose 2.9% y/y. However, Food-at-home inflation is now declining as
commodity costs roll over.
Exhibit 13
CPI Food Away from Home vs. Food at Home
Source: U.S. Bureau of Labor Statistics, Bernstein analysis.
(1.0) pp
(2.0) pp
(1.5) pp
(1.0) pp
(0.5) pp
0.0 pp
0.5 pp
J
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1
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A
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Growth in Consumer Price Index
Apr-11 Mar-12 Apr-12
Relative
Importance
Year-Over-Year Growth
Food & Beverage 3.0% 3.2% 3.0% 15%
Housing 1.0 1.7 1.7 41%
Apparel & Upkeep 0.2 4.9 5.1 3%
Transportation 11.3 4.6 2.7 18%
Medical Care 2.9 3.5 3.4 7%
Recreation (0.4) 1.2 1.1 6%
Education & Comm. 1.0 1.9 2.0 7%
Other Goods & Serv. 1.9 1.7 1.8 3%
Total CPI 3.1 2.6 2.3 100%
Core CPI 1.3 2.3 2.3 75%
Total Energy 18.1 4.5 0.9 10%
Month-Over-Month Growth
Food & Beverage 0.4% 0.1% 0.2% 15%
Housing 0.1 0.1 0.1 41%
Apparel & Upkeep 0.2 0.5 0.4 3%
Transportation 1.3 0.9 (0.5) 18%
Medical Care 0.4 0.3 0.3 7%
Recreation 0.0 0.2 (0.1) 6%
Education & Comm. 0.1 0.2 0.2 7%
Other Goods & Serv. 0.0 0.2 0.1 3%
Total CPI 0.4 0.3 0.0 100%
Core CPI 0.2 0.23 0.24 75%
Total Energy 1.8 0.9 (1.7) 10%
2.9%
3.3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12
Food Away from Home Food at Home
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Wages and Spending. Total wage and salary growth (including supplemental wages) grew by 4.0% year-
over-year in March, down from the 4.2% growth in February, and decelerating fromthe strong growth
experienced over the last few months. Total personal income grew by 3.2%, supported by still solid growth
in other income ex-transfer receipts and wage growth. Overall PCE still grew a solid 4.0%YoY in March,
slightly slower compared to January and December, and outpacing the 2.8% growth in disposable income
(Exhibit 14). As wage growth decelerated in March, consumers have lowered their spending trends with
the savings rate inching up to 3.8% from 3.7% in March.
Of note, we have previously written about the contribution of the declining savings rate in the fall of 2011,
resulting in strong PCE growth. We were previously unsure what would prompt such low savings rate
(below 3.5% and significantly below historical averages) in a period of sluggish consumer confidence and
economic growth. The "mystery" of the very low savings rate has been resolved through government data
revisions. The revised data, presented in the March 2011 release shows wage growth to have been a more
significant contributor to PCE growth, and thus savings rate (which is calculated as a residual after income
and spending) to be a lower contributor (Exhibits 25 - 27). Savings did decline during the fall of 2011, and
did contribute more than in prior months, but not to the extent we originally thought (Exhibit 28).
Exhibit 14
Consumer Spend Equation
Source: U.S. Bureau of Economic Analysis, Bernstein analysis.
Consumer Spending Equation
Annual Rates ($ billion) Contribution to YoY PCE Growth Year-Over-Year Growth Month-Over-Month Growth
Mar-12 Feb-12 Jan-12 Mar-12 Feb-12 Jan-12 Mar-12 Feb-12 Jan-12 Mar-12 Feb-12 Jan-12
Wages & Supplemental $7,587 $7,568 $7,543 2.7% 2.9% 3.1% 4.0% 4.2% 4.5% 0.3% 0.4% 0.4%
+ Other Income Ex-Transfer $3,391 $3,371 $3,356 1.0% 1.0% 1.2% 3.3% 3.3% 3.9% 0.6% 0.4% 0.3%
+ Transfer Receipts $2,351 $2,340 $2,340 0.2% 0.2% 0.1% 0.9% 0.7% 0.4% 0.5% 0.0% -0.1%
Personal Income (PI) $13,328 $13,278 $13,239 3.9% 4.0% 4.4% 3.2% 3.3% 3.6% 0.4% 0.3% 0.3%
Personal Taxes -$1,477 -$1,470 -$1,459 -0.9% -1.0% -1.0% 7.2% 7.5% 7.9% 0.5% 0.7% 1.5%
Disposable PI $11,851 $11,809 $11,779 3.0% 3.1% 3.3% 2.8% 2.8% 3.1% 0.4% 0.2% 0.1%
Personal Savings -$450 -$437 -$507 1.1% 1.3% 0.8%
Personal Outlays $11,401 $11,372 $11,273 4.1% 4.4% 4.2% 4.0% 4.2% 4.1% 0.3% 0.9% 0.6%
Interest Payments/Other -$335 -$336 -$330 -0.1% 0.0% 0.0% 2.2% 1.2% -1.4% -0.2% 1.6% 1.8%
= PCE $11,066 $11,036 $10,942 4.0% 4.3% 4.2% 4.0% 4.3% 4.2% 0.3% 0.9% 0.5%
Note: Savings Rate 3.8% 3.7% 4.3%
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15
Exhibit 15
Wages & Salaries and Supplemental
Exhibit 16
Personal Income
Source: U.S. Bureau of Economic Analysis, Bernstein analysis. Source: U.S. Bureau of Economic Analysis, Bernstein analysis.
Exhibit 17
Other Income Ex-Transfer Payments
Exhibit 18
Transfer Payments
4.0%
-4%
-2%
0%
2%
4%
6%
8%
N
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3.2%
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-4%
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4%
6%
8%
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3.3%
-13%
-8%
-3%
2%
7%
12%
N
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12%
14%
16%
N
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Exhibit 19
Disposable Personal Income
Exhibit 20
Personal Consumption Expenditures
Exhibit 21
Per-Unit Wage Rates
Exhibit 22
Personal Consumption Expenditures Less Wages &
Salary and Supplemental Growth
Note: Total Wages per Person Employed (TWP) defined as Wage & Salary
Disbursements + Proprietary Income the total number of employed persons.
Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis,
Bernstein analysis.
2.8%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
N
o
v
-
0
9
J
a
n
-
1
0
M
a
r
-
1
0
M
a
y
-
1
0
J
u
l
-
1
0
S
e
p
-
1
0
N
o
v
-
1
0
J
a
n
-
1
1
M
a
r
-
1
1
M
a
y
-
1
1
J
u
l
-
1
1
S
e
p
-
1
1
N
o
v
-
1
1
J
a
n
-
1
2
M
a
r
-
1
2
Y
e
a
r
-
O
v
e
r
-
Y
e
a
r

G
r
o
w
t
h
4.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
N
o
v
-
0
9
J
a
n
-
1
0
M
a
r
-
1
0
M
a
y
-
1
0
J
u
l
-
1
0
S
e
p
-
1
0
N
o
v
-
1
0
J
a
n
-
1
1
M
a
r
-
1
1
M
a
y
-
1
1
J
u
l
-
1
1
S
e
p
-
1
1
N
o
v
-
1
1
J
a
n
-
1
2
M
a
r
-
1
2
Y
e
a
r
-
O
v
e
r
-
Y
e
a
r

G
r
o
w
t
h
2.5%
1.8%
-0.2%
-0.4%
(5)%
(3)%
(1)%
1%
3%
5%
7%
M
a
r
-
0
7
M
a
r
-
0
8
M
a
r
-
0
9
M
a
r
-
1
0
M
a
r
-
1
1
M
a
r
-
1
2
Y
e
a
r
-
O
v
e
r
-
Y
e
a
r

G
r
o
w
t
h
Total Wages per Person (TWP)
Average Hourly Earnings (AHE)
Real AHE
Real TWP
-2.1 pp
-6 pp
-4 pp
-2 pp
0 pp
2 pp
4 pp
6 pp
8 pp
10 pp
12 pp
M
a
r
-
1
0
M
a
y
-
1
0
J
u
l
-
1
0
S
e
p
-
1
0
N
o
v
-
1
0
J
a
n
-
1
1
M
a
r
-
1
1
M
a
y
-
1
1
J
u
l
-
1
1
S
e
p
-
1
1
N
o
v
-
1
1
J
a
n
-
1
2
M
a
r
-
1
2
Y
e
a
r
-
O
v
e
r
-
Y
e
a
r

G
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Exhibit 23
Disposable Personal Income Components
Exhibit 24
Savings Rate
Exhibit 25
The wage growth and the savings rate were significantly revised in the March 2012 release solving the "mystery" of
the extra low savings rate
Source: BEA, SCB Analysis
87%
88%
89%
90%
91%
92%
93%
94%
95%
96%
97%
98%
99%
100%
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
Spend Rate
Savings Rate
Interest and Other Payments
Disposable
Personal
Income
3.8%
0%
1%
2%
3%
4%
5%
6%
7%
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11
Wage Contribution to YoY PCE Growth
Pre Revision Wage Contribution to YoY PCE Growth
Post Revision Wage Contribution to YoY PCE Growth
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Savings Rate Pre and Post March 2012
Revision
Savings Rate Pre-Revision Savings Rate After Revision
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Exhibit 26
Prior to the March BEA Revision, the decrease in
personal savings was a significant contributor to PCE
growth
Exhibit 27
Post Revision, the story is still the same but the
magnitude of contribution for personal savings is less
Source: BEA, SCB Analysis Source: BEA. SCB Analysis
Exhibit 28
Contribution to YoY growth of PCE after revision
Source: Bureau of Economic Analysis, SCB Analysis
Consumer Spending. Personal consumption expenditures (PCE) increased by 4.0% y/y in March, slightly
slower compared to February. Spending on durable goods led, up 6.9%, as all subcomponents continued to
show YoY growth. Non-durable goods spending continued to show solid growth, up 4.5%, although
-12%
-8%
-4%
0%
4%
8%
12%
Contribution to YoY Growth of PCE
(Pre Revision)
Interest Payment Personal Savings
Personal Taxes Transf er Receipts
Other Income Ex-Transf er Wages & Supplemental
-12%
-8%
-4%
0%
4%
8%
12%
(Post Revision)
Interest and Other Payments
Personal Savings
Personal Taxes
-12%
-8%
-4%
0%
4%
8%
12%
M
a
r
-
0
8
M
a
y
-
0
8
J
u
l
-
0
8
S
e
p
-
0
8
N
o
v
-
0
8
J
a
n
-
0
9
M
a
r
-
0
9
M
a
y
-
0
9
J
u
l
-
0
9
S
e
p
-
0
9
N
o
v
-
0
9
J
a
n
-
1
0
M
a
r
-
1
0
M
a
y
-
1
0
J
u
l
-
1
0
S
e
p
-
1
0
N
o
v
-
1
0
J
a
n
-
1
1
M
a
r
-
1
1
M
a
y
-
1
1
J
u
l
-
1
1
S
e
p
-
1
1
N
o
v
-
1
1
J
a
n
-
1
2
M
a
r
-
1
2
Interest and Other Payments Personal Savings
Personal Taxes Transf er Receipts
Other Income Ex-Transf er Wages & Supplemental
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decelerating from February's 4.7%rate. Services spending growth increased 3.3% versus the prior year, as
the food services and accommodation component showed solid growth of +6.3%y/y. Electricity and Gas
services showed significant decline with -10.8% in March.
Exhibit 29
Personal Income Components
Exhibit 30
Personal Consumption Expenditures Components
Compen-
sation
63.8%
Proprietors
Income
8.5%
Rental
Income
3.0%
Investment
Income
13.8%
Transfer
Income
18.1%
Social
Security
-7.5%
6.9%
4.5%
3.3%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
Y
e
a
r
-
O
v
e
r
-
Y
e
a
r

G
r
o
w
t
h
Durables Nondurables Services
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Exhibit 31
Personal Consumption Expenditures
Source: Bureau of Economic Analysis, Bernstein analysis
Consumer Confidence. Consumer confidence came in mostly as expected in April, slipping very modestly
versus the prior month to reach 69.2 from 69.5 in March (revised down from 70.2) and versus consensus of
69.6. Headline confidence was roughly flat versus March as sentiment appeared to stabilize in a context of
moderating job growth. Overall, this month's data suggested that consumers remained cautious even as the
current environment improved modestly. While there were no signs of a notable reversal of current
economic conditions indicating that the gains to-date have been relatively durable consumers continued
to temper their expectations about the future. Perceptions about future income growth and business
conditions were less optimistic in April, and consumers' assessment of the labor market appeared mixed.
With recent employment growth showing some signs of traction even if the pace has cooled and with
the housing market starting to stabilize, consumers appear to be cautiously optimistic about the outlook.
Recent declines in gas prices should help reduce pressure on household budgets, but that said, uncertainty is
high and potential shocks to consumption from dysfunctional politics or financial market volatility remain
risks.
The Present Situation subcomponent registered small gains, while Expectations eased modestly from last
month. The Present Situation subcomponent increased 3% versus the prior month, while the Expectations
subcomponent fell 2%. The spread between the two (Present Expectations) was only slightly changed
YoY Change MoM Change
March-12 February-12 March-11 February-11 March-12
Personal Consumption Expenditures 4.0% 4.3% 4.7% 4.7% 0.3%
Durable Goods 6.9% 7.0% 7.3% 10.8% -0.3%
Motor Vehicles and Parts 12.1% 11.4% 10.7% 24.3% -2.2%
Furniture and Household Equipment 6.8% 7.1% 3.1% 3.2% 1.0%
Recreational Goods and Vehicles 2.3% 2.3% 5.6% 4.4% 0.8%
Other 4.7% 6.5% 9.6% 8.6% 0.2%
Nondurable Goods 4.5% 4.7% 7.8% 6.9% 0.9%
Food 4.0% 3.8% 4.2% 3.7% 0.4%
Clothing and Shoes 5.9% 5.5% 3.9% 5.2% 0.5%
Gasoline, Fuel Oil, and Other Energy Goods 3.5% 4.0% 23.4% 16.9% 3.6%
Other 5.0% 5.5% 6.1% 6.2% 0.2%
Services 3.3% 3.8% 3.3% 3.1% 0.1%
Housing & Utilities 1.1% 2.3% 1.7% 0.3% -0.3%
Electricity and Gas -10.8% 0.4% 4.4% -6.2% -5.2%
Other Household Operation 2.7% 2.6% 1.3% 1.2% 0.2%
Transportation 2.9% 3.3% 3.8% 4.3% 0.5%
Heallthcare 2.8% 2.8% 4.5% 4.7% 0.3%
Recreation 7.2% 7.2% 4.1% 3.6% 0.7%
Food Services and Accommodations 6.3% 6.9% 6.6% 6.3% 0.7%
Financial Services and Insurance 3.4% 3.5% 2.9% 3.4% 0.4%
Other 4.1% 4.4% 3.5% 4.1% -0.3%
Consumption for Non Profit 6.9% 6.2% -0.8% -1.0% 1.0%
PCE Less Energy 4.4% 4.4% 4.1% 4.5% 0.2%
"Discretionary" (1) 6.0% 6.2% 5.7% 7.1% 0.1%
Total Energy -1.3% 2.8% 16.2% 8.1% 0.7%
Nonenergy/Nondiscretionary 3.8% 3.9% 3.6% 3.8% 0.3%
(1) Motor vehicles, Furniture & HH Equip., Other Durables, Recreation, 1/3 of Clothing & Shoes.
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versus the prior month, adding 3 points to reach -30. The major categories of the Present Situation
subcomponent showed modest gains while those for Expectations tended to register sequential declines.
The Expectations subcomponent declined 1.4 points (-2% m/m) to reach 81.1 in April from 82.5 in March
(revised down from 83.0). Year-over-year, the subcomponent was down -3%, returning to negative
territory after last month's modest positive YoY gain. Although expectations continue to come down versus
the recent high in February, they still remain at their highest level since last spring. Prospects for business
conditions and income registered weakness, while those for employment were mixed. The percentage of
consumers expecting business conditions to worsen increased 0.5 ppt, and the percentage of consumers
expecting conditions to improve declined 0.5 ppt. The percentage of consumers who expected "fewer" jobs
fell by 0.5 ppt, and the percentage of consumers who expected "more" jobs decreased 0.5 ppt. Expectations
for income weakened, as the percentage of polled consumers who expected "increased income" fell 1.5 ppt,
even as the percentage of those expecting "decreased income" declined 0.6 ppt.
The Present Situation subcomponent increased 1.5 points (+3% m/m) to reach 51.4 in April from 49.9 in
March (revised down from 51.0). Year-over-year, the subcomponent increased 28%, consistent with
readings since the start of the year. Consumers' assessment of employment conditions improved, with a 3.2
ppt decline in the percentage of consumers who feel that jobs are "hard to get" and a 0.6 ppt fall in the
percentage of consumers who perceive jobs as "plentiful." Consumers' impression of business conditions
improved modestly. The percentage of consumers who believe conditions are "bad" increased 0.3 ppt,
while the percentage of consumers who believe that conditions are "good" rose 1.0 ppt.
The spread between the Present Situation and Expectations Indices was little changed in April, as
consumers' relative confidence about current conditions vs. the future held steady. The spread initially
dipped into negative territory in September 2008 as the recent crisis began to unfold in earnest. It suggested
that this recession was following a similar pattern as those of the past five "official" ones, with future
expectations increasing ahead of improvement in near-term sentiment. After bottoming in December 2009
at a level last reached in 1992, the spread hovered inside a narrow range until starting an upward trend in
February 2011. Consumer confidence about current conditions versus the future was essentially unchanged
in April, with the spread turning slightly less negative (+3 points to -30). This suggests that consumers
continued to restrain their expectations about the economic outlook even as the current environment showed
signs of modest improvement. Overall, consumers remain in a cautiously optimistic mindset.
Confidence was mixed across income categories, with the highest-income consumers seeing modest gains
and the lowest-income consumers seeing the sharpest fall. The under-$15,000 group fell 3.8 ppt, the
$15,000-$25,000 group was flat, the $25,000-35,000 group slipped 1.5 ppt, the $35,000-50,000 group fell
0.8 ppt, and the over-$50,000 group increased 1.2 ppt. The confidence gap between the levels of
confidence of greater-than-$50K consumers versus the average of the rest continued to widen in April.
Confidence declined most among the youngest consumers, while sentiment among middle-age consumers
posted the strongest gains. The under-35 group fell 8.8 ppt. The 35-54 group was up 4.4 ppt, and the 55-
and-over group was essentially flat.
Consumers' plans for purchases of big-ticket items declined. Consumers' plans for purchasing major
appliances fell 6.8 ppt versus the prior month, plans for purchasing homes declined 0.5 ppt, and plans to
buy autos dropped 3.0 ppt.
Consumers continued to grow more bullish on the stock market, and expectations for interest rates moved
higher. Consumers expectations for the stock market remained bullish during the month. The survey
registered a 3.1 ppt decline in the percentage of consumers expecting stocks to fall and a 1.2 ppt increase in
the percentage of consumers who expect stocks to rise. Consumers raised their expectations for the path of
interest rates, as the survey registered a 2.0 ppt increase in the percentage of consumers expecting higher
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rates and a 1.7 ppt decline in the percentage of consumers expecting lower rates. Inflation expectations
moderated versus the prior month, reaching 5.83 down from last month's recent high of 6.22.
Exhibit 32
Consumer Confidence Long Term History
Exhibit 33
Consumer Confidence Short Term History
Source: Conference Board, Bernstein analysis. Source: Conference Board, Bernstein analysis.
Exhibit 34
Consumer Confidence Spread Present Situation less Expectations
Source: Conference Board, Bernstein analysis.
Employment Situation. Labor market trends largely flattened out during the spring and summer of 2011
returning to stronger growth in early 2012. However, the last two months have seen more tepid growth.
April payroll growth slowed to +115K and came in below consensus of +165K potentially due to the effect
of higher hiring in prior months as March was revised upward from +120K to up 154K. The private sector
added 130K jobs, led by professional and business services, retail trade, and healthcare. The
unemployment rate declined slightly to 8.1% (from 8.2%) in April. The level of initial jobless claims has
remained range-bound at relatively elevated levels, with March claims at 384K. Year-over-year, the pace
of the declines in initial claims remained roughly the same at -9.4% in April compared to -10.0% in March.
0
20
40
60
80
100
120
140
160
180
200
A
p
r
-
9
0
A
p
r
-
9
2
A
p
r
-
9
4
A
p
r
-
9
6
A
p
r
-
9
8
A
p
r
-
0
0
A
p
r
-
0
2
A
p
r
-
0
4
A
p
r
-
0
6
A
p
r
-
0
8
A
p
r
-
1
0
A
p
r
-
1
2
Index Expectations Present Situation
69.2
20
30
40
50
60
70
80
90
100
110
120
O
c
t
-
0
8
J
a
n
-
0
9
A
p
r
-
0
9
J
u
l
-
0
9
O
c
t
-
0
9
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
(29.8)
(100)
(75)
(50)
(25)
0
25
50
75
100
1
9
6
7
1
9
6
8
1
9
6
9
1
9
7
1
1
9
7
2
1
9
7
3
1
9
7
5
1
9
7
6
1
9
7
7
1
9
7
9
1
9
8
0
1
9
8
1
1
9
8
3
1
9
8
4
1
9
8
5
1
9
8
7
1
9
8
8
1
9
8
9
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
1
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23
Forward looking readings of labor market indicators still suggest improving trends. The ISM's PMI
manufacturing activity index increased slightly to 54.8 in April from 53.4 in March, and remains above the
breakeven level of 50. The ISM services index decreased slightly to 53.5 in March but still implying
growth in the services sector. The U.S. Manpower Employment Survey is projected to remain the same in
1Q 2012 but increase significantly in 2Q12. Finally, the average manufacturing work week stayed the same
at 41.8 hours in April.
Exhibit 35
Initial Jobless ClaimsAverage Weekly Benefit
Exhibit 36
Monthly Nonfarm Payrolls
Source: U.S. Department of Labor, Bernstein analysis Source: U.S. Bureau of Labor Statistics, Bernstein analysis.
Exhibit 37
Unemployment Rate
Exhibit 38
ISM PMI Index
Source: U.S. Bureau of Labor Statistics, Bernstein analysis. Source: Institute for Supply Management, Bernstein analysis
(35)%
(30)%
(25)%
(20)%
(15)%
(10)%
(5)%
0%
0
100
200
300
400
500
600
4
-
1
0
6
-
1
0
8
-
1
0
1
0
-
1
0
1
2
-
1
0
2
-
1
1
4
-
1
1
6
-
1
1
8
-
1
1
1
0
-
1
1
1
2
-
1
1
2
-
1
2
4
-
1
2
Y
e
a
r
-
O
v
e
r
-
Y
e
a
r

G
r
o
w
t
h
I
n
i
t
i
a
l

J
o
b
l
e
s
s

C
l
a
i
m
s

(
0
0
0
)
115.0
(300)
(200)
(100)
0
100
200
300
400
500
600
A
p
r
-
1
0
J
u
n
-
1
0
A
u
g
-
1
0
O
c
t
-
1
0
D
e
c
-
1
0
F
e
b
-
1
1
A
p
r
-
1
1
J
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-
1
1
A
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g
-
1
1
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1
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1
1
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e
b
-
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(
0
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0
)
Month-Over-Month Growth
Three-Month Trailing Average
8.1%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
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20
30
40
50
60
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ISM Purchasing Manager's Index
Growing
Declining
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24
Exhibit 39
Average Manufacturing Workweek
Exhibit 40
Manpower Survey U.S. Net Employment Outlook
Source: U.S. Bureau of Labor Statistics, Bernstein analysis. Source: Manpower Incorporated, Bernstein analysis.
Exhibit 41
Productivity: Non-farm Business Sector
Exhibit 42
Productivity: Manufacturing Sector
Wage Growth Trends. After running negative for much of 2009, nominal wages turned positive at the start
of 2010, although real wages did not turn positive until June of 2010. Inflationary pressures have eaten into
real wage growth, as real wages were 1.7% on 4.4% nominal growth in March (Exhibit 43).
We also examine the growth in wage rates total wages per person employed (TWP) and average hourly
earnings (AHE) to gain more insight into per-unit wage trends. Average hourly earnings have steadily
41.8
40.0
40.2
40.4
40.6
40.8
41.0
41.2
41.4
41.6
41.8
42.0
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7%
8%
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2
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decelerated since peaking at the beginning of 2007, although growth has been relatively steady since
October 2011 with March (latest data available) growth at 1.8%. After averaging ~3.5% over the past year,
growth in total wages per person grew by a more modest 2.5% in March. As price inflation has returned,
real AHE and TWP have lagged increases in nominal terms. Real TWP declined -0.2%, while Real AHE
declined -0.4%.
Exhibit 43
Wages & Salaries
Exhibit 44
Per-Unit Wage Rates
Note: Does not include supplements to wages and salaries
Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, and
Bernstein analysis.
Home Equity Extraction. Very strong home-price appreciation through 1Q:05 resulted in a multiyear asset
boom and, in turn, several hundred billion dollars of annual home-equity extraction during the same time
period.
Our analysis of the change in mortgage debt versus the change in the aggregate value of the housing stock in
the United States implies $300-$900 billion of cash was taken out of the housing market annually between
2003 and 2007. Since early 2008, home equity extraction has turned negative, and the 1Q10 decline of $550
billion set a new low as home foreclosures continue to cause a record amount of write-downs of net home
mortgage debt.
The net change in borrowing is, however, a blunt instrument for determining inflows and outflows, as it
does not take into account that amortization payments are embedded in the net change as individuals pay
off their mortgages, lowering the borrowing outstanding. As such, the total equity withdrawal consists of
the net change in monthly mortgages, plus the amount of outstanding balances paid off.
Federal Reserve research has shown that as much as 45% of refinancing proceeds flowed back into housing in
the form of home improvement and capital improvements in 2004. Since the housing market has been in decline
and refinancing has dramatically slowed, this source of funds has dried up, leading to continued declines in home
improvement spending.
4.4%
1.7%
(6)%
(4)%
(2)%
0%
2%
4%
6%
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Nominal Real
2.5%
1.8%
-0.2%
-0.4%
(5)%
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(1)%
1%
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Total Wages per Person (TWP)
Average Hourly Earnings (AHE)
Real AHE
Real TWP
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Exhibit 45
Home Equity Extraction
Note: Methodology: Equity Extraction = Home Mortgages (net borrowing of household sector) less Residential Capital Expenditures; values taken from the FED flow
of funds quarterly report
Source: U.S. Bureau of Economic Analysis, Federal Reserve Board and Bernstein analysis.
Gasoline Prices. Gasoline prices averaged $3.96 per gallon in April representing a 2.8% increase versus the
average registered in the same month last year. The increase was a YoY deceleration compared to the prior
two months. For May 2012, the EIA forecasts an average price of $3.87, which would represent a 2.3% y/y
decline. After an 18% increase in average (YoY increase of the monthly average) gas prices in 2010 and a
26% average increase during 2011, the EIA currently forecasts a 5%average increase for the full-year 2012
(Exhibit 46).
Exhibit 46
U.S. Retail Gas Prices
Source: DataInsight, EIA, Bernstein analysis.
(232)
(294)
($600)
($400)
($200)
$0
$200
$400
$600
$800
$1,000
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B
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Home-Equity Extraction
Four-Quarter
Trailing Average
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
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2010 2011 2012E
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Exhibit 47
U.S. Retail Gas Prices Long Term History
Exhibit 48
U.S. Retail Gas Prices Short Term Outlook
Source: DataInsight, EIA, Bernstein analysis Source: DataInsight, EIA, Bernstein analysis
While gasoline spending required only 3.5% of income for consumers overall in 2010, it represented a
much higher percentage for those in the lower-income categories. For example, a lower-income household
earning $5,000 to $15,000 typically spends 7% to 11% of its income on gasoline alone. Meanwhile, a
household making more than $70,000 spends about 2.5% of its income on gasoline. Therefore, the lower-
end consumers, and the retailers that cater to them, have been the most affected by gas price increases.
Exhibit 49
Gasoline Spending by Income Level
Source: U.S. Bureau of Labor Statistics 2010 Consumer Expenditures Survey
$3.96
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
$2.60
$2.80
$3.00
$3.20
$3.40
$3.60
$3.80
$4.00
$4.20
$4.40
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LTM Average: 3.67
3yr Average: 3.13
5yr Average: 3.07
-60%
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EIA Forecast
as of 5/2012
2010 Total <$5K $5-10K $10-15K $15-20K $20-30K $30-40K $40-50K $50-70K >$70K
Number of Consumer Units 121,107 4,858 5,280 8,114 8,177 14,729 13,022 11,446 17,368 38,113
Mean Values
Income After Taxes $60,712 ($1,269) $8,283 $12,808 $17,715 $25,282 $34,712 $44,496 $58,291 $123,847
Annual Expenditures $48,109 $20,748 $18,297 $19,909 $24,935 $29,158 $35,556 $40,616 $47,966 $80,708
At least one vehicle owned or leased 88.0% 53.0% 59.0% 69.0% 77.0% 86.0% 91.0% 94.0% 96.0% 97.0%
Gasoline Spending $2,132 $870 $905 $979 $1,252 $1,553 $1,879 $2,152 $2,455 $3,055
Share of Aggregate Spending 1.6% 1.9% 3.1% 4.0% 8.9% 9.5% 9.5% 16.5% 45.1%
% of Spending 4.4% 4.2% 4.9% 4.9% 5.0% 5.3% 5.3% 5.3% 5.1% 3.8%
% of Income 3.5% (68.6%) 10.9% 7.6% 7.1% 6.1% 5.4% 4.8% 4.2% 2.5%
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Exhibit 50
Retail Index Relative P/FE Valuation
Source: FactSet, Bernstein Estimates
Exhibit 51
Retail Index Relative P/FE Valuation
Source: FactSet, Bernstein Estimates
Data Through: 5/11/2012
Current: 1.23x
Mean: 1.09x
Prem./(Disc.): 12%
0.7x
0.8x
0.9x
1.0x
1.1x
1.2x
1.3x
1.4x
1.5x
0
5
/
3
1
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0
7
0
8
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3
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1
1
/
3
0
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7
0
2
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2
9
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0
5
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3
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2
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1
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2
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a
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d

E
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s
S&P Supercomposite Retail Index Valuation:
Five-Year P/FE Relative to the S&P 500
Mean 1 Standard Deviation
Data Through: 5/11/2012
Current: 1.10x
Mean: 1.04x
Prem./(Disc.): 6%
0.8x
0.9x
1.0x
1.1x
1.2x
1.3x
0
5
/
3
1
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0
7
0
8
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3
1
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0
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1
1
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3
0
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0
7
0
2
/
2
9
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0
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0
5
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3
0
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8
0
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2
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8
1
1
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2
8
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0
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0
2
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2
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0
5
/
2
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0
9
0
8
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3
1
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0
9
1
1
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3
0
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9
0
2
/
2
6
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1
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0
5
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2
8
/
1
0
0
8
/
3
1
/
1
0
1
1
/
3
0
/
1
0
0
2
/
2
8
/
1
1
0
5
/
3
1
/
1
1
0
8
/
3
1
/
1
1
1
1
/
3
0
/
1
1
0
2
/
2
9
/
1
2
0
5
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1
1
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1
2
P
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F
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E
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s
Adjusted S&P Supercomposite Retail Index Valuation:
Five-Year P/FE Relative to the S&P 500
Mean 1 Standard Deviation
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Exhibit 52
Stock Performance relative to S&P500 and Retail Index Bernstein U.S. Retailing / Hardlines Coverage
Source: FactSet, Bernstein analysis
Exhibit 53
Stock Performance relative to S&P500 and Retail Index Bernstein U.S. Retailing / Discounters Coverage
Source: FactSet, Bernstein analysis
HD LOW BBY ODP SPLS BBBY WSM AZO AAP ORLY
04/29/2011 (2.6)% (3.5)% 5.9% (9.8)% 6.0% 13.4% 4.3% 0.4% (3.1)% (0.1)%
05/31/2011 (1.0)% (6.7)% 3.1% (1.0)% (19.1)% (2.6)% (8.5)% 5.5% (3.8)% 3.1%
06/30/2011 1.7% (1.6)% 0.7% 2.1% (4.2)% 10.1% (5.0)% 2.1% (4.0)% 10.8%
07/29/2011 (1.4)% (5.3)% (10.0)% (8.3)% 3.8% 2.4% 3.6% (1.0)% (3.9)% (7.0)%
08/31/2011 1.2% (2.0)% (1.6)% (25.5)% (2.5)% 2.9% (4.9)% 13.2% 16.1% 14.7%
09/30/2011 5.6% 4.2% (1.8)% (13.6)% (2.6)% 8.0% 0.2% 11.1% 2.9% 9.9%
10/31/2011 (1.9)% (2.1)% 1.8% 0.4% 1.7% (2.9)% 11.2% (9.4)% 1.2% 3.4%
11/30/2011 10.1% 14.7% 3.8% (1.2)% (3.2)% (1.6)% 1.1% 2.0% 6.9% 2.1%
12/30/2011 6.3% 4.9% (14.6)% (5.3)% (4.5)% (5.1)% 1.1% (1.9)% (0.3)% 2.7%
01/31/2012 1.2% 1.4% (1.9)% 22.6% 1.0% 3.3% (11.2)% 2.7% 5.7% (2.4)%
02/29/2012 3.1% 1.7% (0.9)% 16.8% (3.9)% (5.6)% 3.6% 3.6% 7.3% 2.1%
03/30/2012 2.6% 7.4% (7.3)% 1.4% 7.3% 7.0% (6.0)% (3.8)% 0.6% 2.5%
04/30/2012 3.7% 1.0% (6.0)% (11.1)% (4.1)% 7.8% 4.0% 7.3% 4.4% 16.2%
Relative To S&P Retail Index
HD LOW BBY ODP SPLS BBBY WSM AZO AAP ORLY
04/29/2011 (4.3)% (5.2)% 4.2% (11.4)% 4.3% 11.8% 2.7% (1.3)% (4.8)% (1.7)%
05/31/2011 (1.2)% (6.9)% 2.8% (1.2)% (19.3)% (2.9)% (8.7)% 5.2% (4.0)% 2.9%
06/30/2011 0.5% (2.7)% (0.4)% 0.9% (5.4)% 9.0% (6.1)% 1.0% (5.1)% 9.7%
07/29/2011 (4.5)% (8.3)% (13.0)% (11.3)% 0.7% (0.7)% 0.6% (4.1)% (6.9)% (10.1)%
08/31/2011 0.1% (3.1)% (2.8)% (26.7)% (3.7)% 1.7% (6.1)% 12.0% 15.0% 13.5%
09/30/2011 2.9% 1.4% (4.5)% (16.4)% (5.4)% 5.2% (2.6)% 8.4% 0.1% 7.1%
10/31/2011 (0.3)% (0.6)% 3.3% 1.9% 3.2% (1.4)% 12.7% (7.9)% 2.7% 4.9%
11/30/2011 10.6% 15.3% 4.3% (0.7)% (2.6)% (1.1)% 1.7% 2.5% 7.4% 2.6%
12/30/2011 7.5% 6.1% (13.4)% (4.1)% (3.3)% (3.9)% 2.3% (0.7)% 0.9% 3.9%
01/31/2012 (0.2)% (0.1)% (3.3)% 21.1% (0.5)% (1.1)% (12.7)% 1.2% 4.2% (3.9)%
02/29/2012 2.0% 0.7% (2.0)% 15.8% (4.9)% (6.7)% 2.5% 2.5% 6.3% 1.0%
03/30/2012 (0.9)% 3.9% (10.8)% (2.1)% 3.8% 3.5% (9.5)% (7.3)% (2.9)% (1.0)%
04/30/2012 (0.8)% (3.4)% (10.5)% (15.6)% (8.6)% 3.3% (0.5)% 2.8% (0.1)% 11.8%
Relative To S&P 500 Relative To S&P Retail Index Absolute Perfromance
WMT TGT COST DG WMT TGT COST DG WMT TGT COST DG
04/29/2011 2.8% (4.7)% 7.5% 1.1% 1.1% (6.3)% 5.8% (0.6)% 5.6% (1.8)% 10.3% 4.0%
05/31/2011 1.8% 2.2% 3.3% 9.0% 1.5% 2.0% 3.1% 8.7% 0.4% 0.9% 2.0% 7.6%
06/30/2011 (1.9)% (3.5)% 0.3% (1.5)% (3.1)% (4.6)% (0.8)% (2.7)% (3.8)% (5.3)% (1.5)% (3.4)%
07/29/2011 1.3% 11.9% (1.5)% (5.0)% (1.7)% 8.9% (4.6)% (8.1)% (0.8)% 9.8% (3.7)% (7.2)%
08/31/2011 6.6% 6.0% 6.0% 22.0% 5.4% 4.8% 4.9% 20.8% 0.9% 0.3% 0.4% 16.3%
09/30/2011 4.8% 2.1% 11.7% 10.3% 2.0% (0.7)% 9.0% 7.6% (2.4)% (5.1)% 4.6% 3.2%
10/31/2011 (1.5)% 0.9% (9.4)% (5.7)% 0.0% 2.4% (7.9)% (4.2)% 9.3% 11.6% 1.4% 5.0%
11/30/2011 4.3% (3.2)% 3.0% 2.8% 4.9% (2.7)% 3.5% 3.3% 3.8% (3.7)% 2.5% 2.3%
12/30/2011 0.6% (3.7)% (3.2)% 0.6% 1.8% (2.5)% (2.0)% 1.8% 1.5% (2.8)% (2.3)% 1.4%
01/31/2012 (1.7)% (5.2)% (5.6)% (0.8)% (3.2)% (6.6)% (7.1)% (2.3)% 2.7% (0.8)% (1.3)% 3.6%
02/29/2012 (7.8)% 7.5% 0.5% (5.3)% (8.8)% 6.5% (0.5)% (6.4)% (3.7)% 11.6% 4.6% (1.3)%
03/30/2012 0.5% (0.3)% 2.4% 6.7% (3.0)% (3.8)% (1.1)% 3.2% 3.6% 2.8% 5.5% 9.8%
04/30/2012 (3.0)% 0.2% (2.1)% 3.5% (7.4)% (4.3)% (6.6)% (1.0)% (3.7)% (0.6)% (2.9)% 2.7%
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Disclosure Appendix
Valuation Methodology
Home Depot
We rate HD Market-perform. We set our $49.00 target price using a 1.15x relative P/E multiple against our
12-month forward EPS estimates, four quarters hence (currently 2Q13-1Q14) of $3.25.
Lowes
We rate LOW Market-perform. We set our $32.00 target price using a 1.05x relative P/E multiple against
our forward EPS estimates, four quarters hence (currently 1Q13-4Q13) of $2.27.
Best Buy
We rate BBY market-perform with a $28.00 price target. We set our price target using our 12-month
forward EPS, four quarters hence (F14), of $3.44 and apply a 0.6x relative P/FE.
Office Depot
We rate ODP Outperform. We set our target price using a normalized earnings method based on a relative
P/E against our forward EPS estimate. Our assumptions include a normalized margin rate of 3.0% on
forward sales (FY12) of ~$11.5B for normal EPS of ~$0.68 against an absolute / relative earnings multiple
of 9.0x (~0.67x relative P/E) for a price target of $6.
Staples
We rate SPLS Outperform. We set our $18 price target using a 0.8x relative P/FE against our 12-month
forward EPS estimate, 4 quarters hence (2QF13 - 1QF14) of $1.84 (excluding the impact of amortization of
intangibles).
Bed Bath & Beyond Inc
We rate BBBY Outperform. We set our $84.00 target price using a 1.2x relative P/E multiple against our
forward EPS estimate, 4 quarters hence (currently 1Q13 through 4Q13) of $5.23.
Williams-Sonoma Inc
We rate WSM Market-perform. We set our $39 target price using a 1.10x relative P/E multiple against our
12-month forward EPS estimates, four quarters hence (currently 1Q13-4Q13) of $2.71.
Autozone Inc
We rate AZO Market-perform. We set our $394 target price using a 1.0x relative P/E multiple against our
forward EPS estimates, four quarters hence (currently 3QF13-2QF14) of $29.62.
Advance Auto Parts Inc
We rate AAP Market-perform. We set our $75.00 target price using a 0.9x relative P/E multiple against our
forward EPS estimates, four quarters hence (currently 2QF13-1QF14) of $6.68.
O'Reilly Automotive Inc
We rate ORLY market-perform. We set our $96.00 target price using a 1.35x relative P/E multiple (~17.8x
absolute) against our forward EPS estimates, four quarters hence (currently 2QF13-1QF14) of $5.38.
Wal-Mart Stores Inc
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We rate WMT Market-Perform with a $68 price target. We set our price target using a 1.0x relative P/FE
multiple (12.5x absolute) against our forward EPS estimate, four quarters hence (currently 2QF14-1QF15)
of $5.47. We verify this against our DCF valuation.
Target Corp
We rate Target Outperform with a $67 price target. We set our price target using a 1.0x relative P/FE
multiple on our EPS forecast for the core U.S. business (ex-Canada), four quarters hence (i.e., 2QF13-
1QF14) of $5.36. We verify this against our DCF valuation.
Costco Wholesale Corp
COST: We rate COST Underperform with a $81 price target. We set our price target using a 1.5x relative
P/FE multiple against our forward EPS estimate, four quarters hence (i.e., 3QF13-2QF14) of $4.14. We
verify this against our DCF valuation.
Dollar General Corp
We rate DG Outperform with a $55 price target. We set our price target using a 1.2x relative P/FE multiple
against our forward EPS estimate, four quarters hence (currently F13) of $3.38. We verify this against our
DCF valuation.
Risks
Home Depot
The primary cyclical risk we see to our HD price target is from HD's exposure to the housing market. If the
housing market correction is sharper or lasts longer than we expect, HD's sales and earnings will be worse
than we are modeling, presenting a downside risk to our price target. A second risk is that the home
improvement sector is increasingly well penetrated at the individual market level, leading to greater impact
from own store cannibalization and competitive openings. Ensuing pricing pressure and comp store drags
could create downside risk to our estimates and price target. Finally, HD is implementing large-scale
technology initiatives which pose risks to our target price if the timing, direction, or magnitude of the
impact from the changes is different from our expectations.
On the upside, a faster recovery in housing could lead to pent-up demand and stronger sales than we
anticipate, leading to risk that our price target could prove too conservative. The company could
aggressively reduce costs which could result in a higher earnings and valuation and upside risk to our price
target. Merchandising and supply chain initiatives could results in strong margin expansion and cause the
stock to exceed our target price.
Lowes
The primary cyclical risk we see to our LOW price target is from LOW's exposure to the housing market. If
the housing market correction is sharper or lasts longer than we expect, LOW's sales and earnings will be
worse than we are modeling, presenting a downside risk to our price target. A second risk is that the home
improvement sector is increasingly well penetrated at the individual market level, leading to greater impact
from own store cannibalization and competitive openings. Ensuing pricing pressure and comp store drags
could create downside risk to our estimates and price target. A third risk relates to the company's growth
strategy of increasing store count at an above-industry rate. If store growth is significantly slower than we
expect, or new store productivity is lower than we expect, there is downside risk to results and to our price
target.
On the upside, a faster recovery in housing could lead to pent-up demand and stronger sales than we
anticipate, leading to risk that our price target could prove too conservative. The company could
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aggressively reduce costs or halt store expansion could result in a higher valuation and upside risk to our
price target.
Best Buy
For BBY, on the downside:
A deteriorating demand environment would result in negative comps, expense deleverage and earnings
weakness, which presents a risk to the stock achieving our price target.
The company has invested in various concepts outside of its core retail business, including PC services,
home theatre installation, small business services and product sales, and international expansion. These
investments have been made in anticipation of changing consumer preferences and regional demand and in
an effort to support growth as the core business matures. If these concepts fail to capture adequate returns,
future earnings may be at risk, which presents a risk to the stock achieving our price target.
For BBY, on the upside:
The non-core growth investments made by company could achieve better than expected growth and returns,
driving greater value and extending the growth horizon. Such a scenario could present significant upside to
our price target.
A second wave of consumer adoption into newer ATV technologies (such as OLED or Laser TV) could
drive enough demand back towards specialty Consumer Electronics retail to offset the current structural
shift of demand towards mass channels. BBY's position as a best in class operator and its broad offering of
related services would allow the company to capitalize on such an opportunity better than its competitors.
Such a scenario could present significant upside to our price target.
Office Depot
Office products demand remains tied to small business spending and white-collar employment. For ODP,
risks to our price target include: (1) prolonged operating weakness or vendor actions leading to a liquidity
crisis despite the significant improvement in cash generation driven by the company over the past few
quarters; or (2) company specific mis-execution in returning profitability back to historical levels; or (3) a
more promotional sector with increasing competition from cross-channel competitors like the discounters,
which would cause market share loss and gross margin weakness could present risk to our earnings
forecast.
Staples
Office products demand remains tied to small business spending and white-collar employment. For Staples,
risks to our price target include (1) slower revenue growth due to worse than expected deterioration in
business investment and small business spending; (2) margin pressure from mis-execution in the integration
of the Corporate Express acquisition leading to worse than expected synergies; (3) company specific mis-
execution around the European turnaround or the growth strategies for the North American Delivery and
Retail businesses; (4) uncontrollable swings in foreign currency.
Bed Bath & Beyond Inc
For BBBY, on the downside, near-term risks include the promotional environment as well as unexpected
demand variations. Any sharpening of pricing to clear inventories poses a downside risk to merchandise
margins. Moreover, any unexpectedly sharp further pullbacks in housing market performance or labor
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market and consumer spending/confidence trends will almost certainly be reflected in financial results and
stock performance. Longer-term, the primary risks center around growth and expansion opportunities,
including the companys ability to grow the Christmas Tree Shops, Buy Buy Baby and Harmon chains.
Williams-Sonoma Inc
Our Market-perform view on WSM is subject to a number of general economic and company-specific risks.
Housing market performance as well as labor market and consumer confidence trends will almost certainly
be reflected in the companys financial performance and any unexpectedly sharp pullbacks in these
economic metrics would likely impact stock performance on the downside and present a risk to our price
target.
However, the most significant longer-term risk we see comes from the variability in prospects implied by
the companys broadened brand portfolio, including emerging brands West Elm, PB Teen, and WS Home.
While we feel that we have a reasonable grasp of these options today, we could miss downside stock
movements if we are unable to discern material changes in emerging concepts outlooks before they are
reflected in WSMs share price.
On the upside, strong operating performance, the exit of major competitors and a better than anticipated
recovery in home furnishings demand could lead to stronger earnings and present an upside risk to our price
target.
Autozone Inc
Our Market-perform view on AZO is subject to a number of general economic and company-specific risks.
be reflected in the companys financial performance and any unexpectedly sharp pullbacks in these
economic metrics would likely impact stock performance on the downside and present a risk to our price
target. On the upside, improvement in the economy could translate to improving miles-driven and stronger
demand for auto parts, in which case our price objective could be too low.
Company specific risks include those related to our expectations for AZO's commercial business. If AZO's
penetration of the commercial market is slower than we expect, overall growth and returns will be too.
More generally, AZO's value depends critically on its ability to generate industry-leading returns on capital.
Diminishing returns due to competitive pressures would present risk to AZO's financial results and our
price target.
Advance Auto Parts Inc
Our Market-perform view on AAP is subject to a number of general economic and company-specific risks.
be reflected in the companys financial performance and any unexpectedly sharp pullbacks or gains in these
economic metrics would likely impact stock performance on the downside or upside and present a risk to
our price target.
Company specific risks include those related to our expectations for the success of AAP's turnaround. On
the upside, if new management can drive better than expected topline growth with the deployment of new
systems, processes, and inventory management, then AAP's sales and profitability will likely exceed our
expectations, creating risk to our price target. Another upside risk lies in management's ability to extract
better margins out of its existing sales, through either unforeseen cost cuts or initiatives to enhance gross
margin. On the downside, AAP's turnaround could incur far greater costs than we anticipate or sales
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volatility could increase under new management. Either case would present risks to results and our price
target.
O'Reilly Automotive Inc
Our Market-perform view on ORLY is subject to a number of general economic and company-specific
risks. Housing market performance as well as labor market and consumer confidence trends will almost
certainly be reflected in the companys financial performance and any unexpectedly sharp pullbacks or
gains in these economic metrics would likely impact stock performance on the downside or upside and
present a risk to our price target. Weather can impact the near-term demand for after-market auto parts
(positively or negatively) and hence can cause sales to accelerate or decelerate, with resulting impact on
earnings, revisions, and the likelihood of the stock to achieve our price objective.
Company specific risks include those related to our expectations for the success of the CSK Auto
acquisition. If ORLY is able to generate more (or fewer) synergies through its acquisition of CSK or if the
integration process is longer or shorter or more or less challenging than we expect, there would be risk to
our earnings estimates and our price target.
Wal-Mart Stores Inc
Our Market-Perform view on Wal-Mart Stores is subject to a number of macroeconomic and company-
specific factors that would pose risks to our earnings estimates and price target. On the upside, these
include better-than-expected top-line growth and/or margin expansion in the U.S. stemming from Project
Impact, International operating margin and/or ROIC that improves faster than our forecast, weakening of
the dollar against other major currencies that would benefit revenue and operating profit, and higher-than-
expected square footage growth in the U.S. and/or abroad. Moreover, a "double-dip" recession could drive
an investor flight to safety, positively impacting WMT's stock performance.
On the downside, higher gas prices could constrain spending among Wal-Mart's core lower-income
customers, while strengthening of the dollar against other major currencies would negatively impact
revenue and operating profit. In addition, significant strategic initiatives currently underway in the U.S.
Stores Segment and Sam's Club are subject to meaningful execution risks. Likewise, Wal-Mart's corporate-
level systems initiatives could take longer, cost more, and/or deliver less benefit than anticipated, and are
also subject to execution risks. Finally, labor legislation also poses a meaningful risk particularly given
Wal-Mart's high-priority status among union organizers as does healthcare reform.
Target Corp
Our Outperform view on Target Corporation is subject to a number of macroeconomic and company-
specific factors that would pose risks to our earnings estimates and price target. Near-term risks include
unanticipated further weakening of the consumer spending environment, a heightened promotional
environment especially during the upcoming holiday season, and deterioration in credit card portfolio
performance. Broadly, any unexpected sharp pull-backs in the labor market and/or consumer
spending/confidence will almost certainly be reflected in Target's financial results and stock performance.
Longer-term, the primary risks on the retail side center around Target's ability to continue to offer
compelling discretionary merchandise while managing inventory risk in order to support both top-line
growth and margin expansion, to maintain expense discipline, and to capture adequate real estate
opportunities to support a re-ramping of square footage growth. On the credit side, more stringent
regulations on card issuers is a medium-term risk, as is Target's ability to appropriately provision for
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anticipated losses and manage receivables in a potentially evolving credit environment. Finally, labor
and/or healthcare legislation present risks to the large retailers in our coverage.
Costco Wholesale Corp
Our Underperform view on Costco Wholesale Corporation is subject to a number of macroeconomic and
company-specific factors that would pose risks to our earnings estimates and price target. On the upside,
these include stronger-than-expected top-line recovery driven by company-driven merchandising and
membership initiatives and/or a broader economic bounce-back benefiting Costco's more affluent core
customer, merchandise margin expansion and/or expense leverage that exceeds our expectations,
weakening of the dollar against other major currencies that would benefit revenue and operating profit,
higher-than-expected gas prices that could drive sales above our forecast, and higher-than-expected square
footage growth in the U.S. and/or abroad which would drive a greater new store contribution than we have
incorporated in our forecast.
Dollar General Corp
Our Outperform view on Dollar General is subject to a number of macroeconomic and company-specific
factors that would pose risks to our earnings estimates and price target. Near-term risks include
unanticipated weakening of the consumer spending environment, a heightened promotional environment or
more intense price competition from large competitors. Longer-term, the primary risks center on Dollar
General's ability to execute its multiple initiatives to remerchandise the assortment, increase private label
penetration, shift sourcing to direct foreign vendors, and manage inventories efficiently. Any failure to
execute these initiatives would pose a risk to our forecast for margin expansion, earnings and our price
target. Additionally, our topline forecast is predicated on solid same store sales growth and a steady
expansion of the store base. Weak sales growth would pose a risk to our forecast and price target, while
inability to secure real estate and open stores is also a risk to our estimates and price objective.
SRO REQUIRED DISCLOSURES
References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong)
Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a
licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively.
Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration,
productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating
investment banking revenues.
Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the
U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian
companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside
of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless
otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
As of 05/15/2012, Bernstein's ratings were distributed as follows: Outperform - 40.4% (1.5% banking clients) ; Market-Perform - 50.6%
(0.4% banking clients); Underperform - 9.0% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses
represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve
(12) months.
Bernstein currently makes a market in the following companies SPLS / Staples, BBBY / Bed Bath & Beyond Inc, COST / Costco Wholesale
Corp.
In the past twelve (12) months, Bernstein or an affiliate managed or co-managed a public offering of securities of DG / Dollar General
Corp.
In the past twelve (12) months, Bernstein or an affiliate received compensation for investment banking services from DG / Dollar General
Corp.
In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services
from DG / Dollar General Corp.
This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can
also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or
Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford C. Bernstein
(Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central,
Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a
licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, Director of Compliance,
30 Cecil Street, #28-01 Prudential Tower, Singapore 049712.
12-Month Rating History as of 05/17/2012
Ticker Rating Changes
AAP M (IC) 05/06/08
AZO M (RC) 01/12/09
BBBY O (RC) 01/22/08
BBY M (RC) 10/23/06
COST U (RC) 01/09/12 M (IC) 09/30/09
DG O (IC) 12/23/09
HD M (RC) 05/11/09
LOW M (RC) 05/11/09
ODP O (IC) 11/07/01
ORLY M (IC) 05/06/08
SPLS O (RC) 06/15/06
TGT O (IC) 09/30/09
WMT M (IC) 09/30/09
WSM M (RC) 05/11/09
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
OTHER DISCLOSURES
A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and
when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its
coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models,
please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a
range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are
subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this
valuation.
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