Why the ICSC-Goldman and Redbook retail indices had strong gains

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ICSC-Goldman Same Store Sales and Redbook Indices

The ICSC-Goldman Same Store Sales and Johnson Redbook Indices are weekly retail reports that provide an overview of same store sales growth in the U.S. These indices only represent 10% of the total retail sales in the U.S. Also, being weekly indices, they are more prone to fluctuations compared to the monthly retail sales release compiled by the U.S. Census Bureau, which we discussed in the last section.

However, because these indices include sales data from major retail chains, they’re closely watched by market participants.

Part 8

ICSC-Goldman Same Store Sales, Redbook Indices reports for the week ending July 12

Same store sales increased by 0.1% over last week, according to the ICSC-Goldman Same Store Sales Index. Sales are up by 4.5% over the same period last year, bolstered by gains in most retail segments—mainly drugstores, department stores, and apparel retailers.

The gains were almost matched by the Redbook Store Sales Index, which reported 4.1% growth over last year.

Economic and investor impact of retail sales

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Retail sales are key to the consumption component of the gross domestic product (or GDP). In 2013, U.S. retail sales were estimated at ~$4.5 trillion or ~27% of the GDP. Therefore, shifts in retail spending are key drivers for economic growth. They can have a significant impact on financial markets, such as the S&P 500 Index (SPY).

GDP contracted by 2.9% in 1Q14. Although this was dismissed as a weather-related anomaly, retail sales and consumer spending are key to ensuring healthy growth in the economy for the rest of the year.

Outlook

Markets have become accustomed to below-par retail sales growth in the past few months. Despite the recovery in the labor market, retail sales growth has lagged in sectors like manufacturing. An increase in the savings rate has been apparent in the past few months, according to the Personal Income and Expenditure report released by the Bureau of Economic Analysis.

As a result, returns on consumer discretionary exchange-traded funds (or ETFs) like the SPDR Consumer Discretionary Select Sector ETF (XLY) and the State Street SPDR S&P Retail ETF (XRT), have lagged returns on broad-based market indices such as the S&P 500 Index (SPY).

However, going forward, these ETFs will likely be influenced positively as labor market improvements make their impact felt on the economy and consumer spending.

The retail earning season will commence in August, when major retailers such as Walmart (WMT) and Target (TGT) declare earnings. Retail trends that are more broad-based will be further apparent, as will the impact of better-than-expected labor market improvements this year.

 

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