“Snowstorms do not destroy demand”

The Labor Department reported that initial unemployment claims rose by 18,000 last week to 409,000. The number for the week before was revised up by 3,000 to 391,000. Last week’s report got some attention because it dropped pretty sharply. This drop coupled with the very strong ADP report hints that tomorrow’s jobs reports will be strong.

Why is this important for investors? The good news is that profit growth has been very strong lately. The problem is that the increase in profits has mostly been due to increased profit margins.

For example, let’s look at Wal-Mart (WMT). For their fiscal year that ended in January 2010, their sales rose by less than 1% while their profits rose by 7%. For the first nine months of this year, sales were up by 3.8% while profits rose by 7.5%. Make no mistake, that’s good. The issue is that raising profit margins can’t continue forever. At some point, a company needs to grow its sales. More profits means more sales which means more jobs.

We’re also getting sales reports from retailers and so far, they’re not so good.

Some U.S. retailers’ sales fell short of analysts’ projections last month as a blizzard the day after Christmas kept shoppers from stores, overshadowing earlier holiday buying.

Sales at stores open more than a year at Gap Inc., the largest U.S. apparel retailer, declined 3 percent, compared with the 2.4 percent average increase indicated by analyst estimates compiled by Retail Metrics Inc. Macy’s Inc., Target Corp. and American Eagle Outfitters Inc. also trailed projections.

A Dec. 26 storm that dumped more than a foot of snow on parts of the U.S. Northeast “disrupted” post-holiday shopping, Macy’s Chief Executive Officer Terry Lundgren said in a statement. The day after Christmas is typically one of the busiest shopping days of the year. That may have pushed sales into January, according to Customer Growth Partners’ Craig Johnson.

“Snowstorms do not destroy demand, they simply displace demand,” said Johnson, president of the New Canaan, Connecticut-based retail consulting firm. “Those gift cards don’t disappear, they get redeemed in January.”

The Buy List is having another good day. Leucadia (LUK), Reynolds American (RAI) and Moog (MOG-A) are all at new 52-week highs. Ford (F) and Wright Express (WXS) are also close to new highs.

Posted by on January 6th, 2011 at 10:29 am


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