Slightly Lower Gas Prices Do Not Spark Huge Increases in Consumer Spending

Oil is down a couple of bucks and retailers are on fire. Sears Holdings (SHLD) jumps $9 per share today? Remember everyone, rising gas prices did not result in plummeting retail sales and this subsequent drop does not mean Sears is all of the sudden going to see an influx of shoppers or its average ticket rise meaningfully.

These small incremental changes in the price per gallon does not materially change behavior. If national gas prices drop from the peak around $4.10 per gallon to, let’s say, $3.50, how much does the average consumer save? Well, let’s say you fill up once a week and have an 16 gallon tank. We are talking about less than $10 per week, or about $500 per year.

Now, I am not saying that extra $500 does not have an economic impact, because it definitely does. That said, it will not translate into incremental earnings at the retail level that would justify a 5%-10% jump in share prices of the nation’s leading retailers. As much as I would love to say otherwise, Sears should not be up $9 in today’s market.

Full Disclosure: Long shares of Sears at the time of writing

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5 Thoughts on “Slightly Lower Gas Prices Do Not Spark Huge Increases in Consumer Spending

  1. I agree and am also long Sears but I was wondering if you thought it had to do with some short covering? It is one of the most shorted stocks in the market now.

  2. Chad Brand on August 6, 2008 at 5:36 AM said:

    Sure, short covering ahead of the Fed meeting had a lot to do with yesterday’s market rally. Still, retailers outperformed for macro reasons too, I think.

  3. Nothing has really changed. Macro wise I still think we are in the 6th inning. No way we are done with write offs. Although, I would love to think that it reflects a shift and that Sears was just sooo sold off but its not that easy.

  4. dingojoe on August 6, 2008 at 11:28 AM said:

    Well, Sears/KMart is a crummy retailer so really nothing should help their sales. Ultimately, SHLD will be about whether the real estate and brands have value and can that value be unlocked somehow.

    I think near term,and especially in the 3rd and 4th Q, SHLD could really crank out some awful numbers, in part because of the Canadian Dollar.

    Sears Canada has been really the only star in SHLD, increasing it’s margins, revenue and cash flow. It’s gone from 8.1% of sales of what would become SHLD in 2004 to 11.5% of sales now and accounted for a whopping 40% of cash flow for SHLD in the 1Q. Unfortunately, it’s all been due to a steeply appreciating Loony vs the US Dollar and now for the first time in the SHLD era it looks like Sears Canada will have to post YOY numbers with the Loony actually below previous year values.

    Up till now, Sears Canada had been able to take the edge off some poor numbers posted by KMart and Sears Domestic. If Sears Canada has to start adding negative numbers on top of bad KMart and Sears Domestic numbers, look out.

  5. 8 stock portfolio on August 6, 2008 at 5:06 PM said:

    maybe the psychological impact adds more than the incremental $500 per year. Since gas is something you buy every week, seeing the price constantly increase is downright depressing. Seeing the price declining could have the opposite effect.

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