Matter of Fact – w/c 8th June 2015


June 8th 2015 Edition


1. OPEC maintains oil output

2. Retail Sales figures remained muted but what lies beneath

3. More to jobs report than meets the eye


1. OPEC maintains oil output

OPEC oil ministers decided to keep oil production at 30 million barrels per day during their meeting in Vienna. The last few months have seen a return to normalcy for oil prices as they have been comfortably increasing (Brent hovering at $62 a barrel and WTI at $58). QMG’s coverage of the Oil Exploration and Oil Refining sub-sectors has also seen this pick up in prices as they either inflect upwards or the declines observed appear to be decelerating.

News like this should allay any investor fears of increasing production bringing oil prices back down however there is still cause for concern.

On the one hand, labour productivity in non-OPEC countries, has been quite volatile (see below) and a move towards lower productivity acts as a trigger to place a ceiling on wages which in turn impacts consumption.

Chart 1

Chart 1. QMG composite chart (Oil Refiners and Oil Explorers) Labour Productivity and Wages

Additionally, pending a lifting of sanctions, Iran’s re-entry into the oil suppliers looms as a question mark that investors should consider. How Iran will affect future prices is pertinent to this discussion as they have an enormous amount of oil sitting in storage either on land or in ships. Theoretically this would not take very much time to release and could significantly impact oil prices and in turn earnings of oil related stocks.

The real key here is market share, and how suppliers and related downstream or upstream companies will fight to keep theirs. So whilst the news of today’s OPEC meeting may have kept the fear-mongering at bay, we would still advise a cautionary approach to this sector.


2. Retail Sales figures remained muted but what lies beneath

Relying on high level top-line numbers such as the US Retail sales figures can only do so much when you’re trying to understand how economic movement affects the earnings of Retail related stocks. The full publication does give a breakdown to some sub-sectors but the release and analysis of broader, longer termed themes is not clear from these datasets without further detailed analysis. On the other hand, fundamental analysis at the company level also brings out certain limitations including the subjective nature of its approach and the timeliness of revisions and updates to analyst views.

This is not to discount the approaches, but the accuracy could be further improved by understanding what goes on in the middle. This is where sub-sector level research can bridge the gap. What’s even more helpful is that this type of data is available and is based on information from National Statistics Offices around the world. It’s the new level of insight that QMG provides and it could potentially save your neck when you’re about to pull the trigger on a risky trade. So how does this work for Retail Sales?

Take the example of Wal-Mart (WMT US). It maps to 2 sub-sectors we have coverage over – Multi Retailers and Food Retailers. Multi Retailers are companies like Costco, Macy’s, JC Penney, etc. Food Retailers include Safeway, Wholefoods, Kroger etc.

Our data shows that Sales growth for Multi Retailers is at its lowest levels since late 2009.

Chart 2

Chart 2. US Multi-Retailers Sales Growth

Whilst prices have been in a slow and steady decline, the main driver of the sales drop-off has been the rapid decline in volumes:

Chart 3

Chart 3. US Multi-Retailers Price, Cost, Volume Growth

What’s more interesting when you dig into the numbers is that labour costs are on the way up along with wages and productivity is slowing down.

Chart 4

Chart 4. US Multi-Retailers Labour Cost and Service Cost Growth

Chart 5

Chart 5. US Multi-Retailers Labour Productivity and Wage Growth

These factors have led to an inflection the otherwise positive view that QMG has had on this sub-sector since the beginning of 2014.

WMT has a strong relationship to QMG’s sub-sector data with a +75% positive correlation between its actual revenue growth and the QMG composite. As far as analysis of WMT goes, the US Retail Sales figure and fundamental analysis will paint you part of the picture, but sub-sector research will ensure that the view is based on facts.

Chart 6

Chart 6. US Multi-Retailers Sales growth vs QMG Composite

Next week, USD core retail sales figures come out on Thursday (June 11) and the forecast is for an increase to 1.1% MoM from 0% last month. At a sub-sector level this does not look likely considering the steepness of the drop-off and the continued frugalness of the American consumer. Whatever the number turns out to be, QMG’s data can be useful for quickly identifying long term trends at the sub-sector level for more identifiable relationships to Retail related stock like Wal-Mart.


3. More to jobs report than meets the eye

The May non-farm payrolls numbers came out last week and it ended up better than expected at 280k. March was revised up 35k to 119k and April was pushed down slightly from 221k to 219k. The unemployment rate at 5.5% was a little more than expected. This is made up of 397k entering the labour force during this period but not all found jobs.

The jobs report is an indicator for future policy movements from the Federal Reserve and the positive numbers will put pressure on the government to either enact an interest rate increase or not.

The above top line numbers have been reported in many news outlets from CNBC to Bloomberg to Reuters, etc. This does get broken down further into how well certain industries performed. This includes hospitality adding 57k, health care up 47k, retail up 31k and construction down 17k. Mining was the highlighted contraction at a 17k loss.

The break-down does not stop there as QMG can help break this down further. Not only do we see different measures (labour productivity, wages, labour costs) but we also break down various industries. For example in the retail space we can break it down into the following sub-sectors:

      • Auto part retailers
      • Auto retailers
      • Clothing retailers
      • DIY Retailers
      • Electrical retailer
      • Food Retailers
      • Footwear Retailers
      • Furniture retailers
      • Jewellery retailers
      • Multiple retailers (incl department stores)
      • Retailers of cosmetic & toilet goods
      • Retailers of floor coverings
      • Retailers of medical, cosmetic & toilet goods
      • Womens clothing retailers

So whilst the overall Retail sector might be improving overall, the further break-down means that there are bound to be winners and losers within the group or that all sub-sectors had only minor increases. Either way this is a story that’s not implied from the top line number.

Let’s look at 2 samples from this space, Auto Part Retailers and Clothing Retailers.

Firstly here is look at how labour productivity and wage growth for both sectors:

Chart 7

Chart 7. US Auto Part Retailers Labour Productivity and Wage Growth

Chart 8

Chart 8. US Clothing Retailers Labour Productivity and Wage Growth

From the above we can see that wages have been coming down in the Auto Part Retailers space and starting to increase in the Clothing Retailers sector. So not all retailers will necessarily be experiencing the lift in payrolls that is being shown by top-line figures you see in the news.

Furthermore, it gets interesting when we look at Labour Costs which are down for Auto Part Retailers:

Chart 9

Chart 9. US Auto Part Retailers Detailed Cost Dynamics

And trending upwards for Clothing Retailers.

Chart 10

Chart 10. US Clothing Retailers Detailed Cost Dynamics

Again the difference between the 2 sectors can be easily seen with the access to QMG’s sub-sector level research. Not all stocks that are retail related will be affected in the same way so it’s important to view the more granular level details whenever possible.

In relation to top line sales figures, both of these sectors see declining or negative sales growth year on year:

Chart 11

Chart 11. US Auto Part Retailers vs US Clothing Retailers Sales Growth

In fact all retailers in the US combined had sales growth declining over the past year:

Chart 12

Chart 12. US Retail Related Sectors – Sales Growth

So the biggest question remains as to whether an increase in jobs numbers will help or hinder the companies that participate in these sub-sectors. The above shows the companies that sit in the Auto Part Retailers space (Advance Auto Parts, Genuine Parts Co or Pep Boys-Manny Moe & Jack who are reporting later today) are not going to experience the same macro level impact of the payroll figure as companies sitting in the Clothing Retailers space (The Gap, Lululemon, Urban Outfitters etc).


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