Retail sales: Investors shouldn’t ‘read too much’ into May decline, strategist says

ProShares Executive Director of Thematic Investing Scott Helfstein joins Yahoo Finance Live to discuss May retail sales data, inflation, consumer spending, and the outlook for economic growth.

Video Transcript

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- US retail sales unexpectedly fell 3/10% in May as inflation sends food and gas prices to record levels, weighing on consumer spending. The fall in May is a sharp reversal from the increase in April. Joining us now to discuss, we've got ProShares Executive Director of Thematic Investing Scott Helfstein. And Scott, how do you read into today's data, specifically going into what-- the Fed is also going to be discussing on the topic of inflation and where that is impacting consumers and showing up in some of the data now.

SCOTT HELFSTEIN: Well, thanks for having me. The top line number that we see in a month-over-month basis did show a little contraction in May and April was revised down. But if we look on a year-over-year basis, it still represented 9% growth in retail over last year. That is enough to beat our elevated 8.6% inflation level.

So I don't think investors should read too much into this slight decline. On a year-over-year, both regular sales-- and we track pretty closely the online and e-commerce, what is the non-store category-- that similarly grew at about 9%. So it's not all doom and gloom. I think the retail sales continue to show a strong consumer. And the Fed is going to be paying attention, not just at the month-over-month high frequency, but the year-over-year.

So I think it's one of those numbers that kind of just puts them in a little bit of a gray area, if you will. I don't think it's going to-- it wouldn't be information that would push them one way or the other.

- Let's talk about non-store retail in particular, aka online retailer, aka really Amazon, if we're talking about the retail figure, some of the government. That number was down month-over-month by 1%. And as you said, you guys have some ETFs that track online specifically. What do you make of that number?

SCOTT HELFSTEIN: So we're still, we believe, dealing with distortions from the pandemic. During COVID, at its peak, online sales topped out at just less than 16% of total retail in the United States. It's subsequently come down and has been roughly just shy of 13% in the most recent readings. So people turned online. They turned online for things they had never bought before like groceries, like clothes.

And as stores have reopened-- and we saw, for example, Nordstrom's and Macy's put out pretty strong quarters. Stores have reopened. People have wanted to get out of the house and shop. So we think that this is still a long-term expansion story, but we're working through some of those distortions that we had from COVID.

The 9% year-over-year growth is still pretty close to the average of 10%, which is the year-over-year for the non-store sales going back 20 years is the year-over-year growth rate. So we were pretty much on the long-term trend year-over-year. So we think that that will continue.

- Well, Scott, I mean, looking at your online retail ETF, the ProShares online retail ETF, which we were just showing, it's down 42% here today. If I look at a longer term chart, it's like the pandemic never happened. It's literally like it never happened. It's back. It's erased all of the gains from the pandemic. So if you're talking about this pull-forward effect, does that mean effectively-- I mean, if we're back at long-term trend, does that mean we're going to see the growth for these companies that we saw in 2018, 2019?

SCOTT HELFSTEIN: We expect to return to trend-- a matter of fact, not just we, but consensus estimates on the ProShares online index based off of Bloomberg do call for 30% top-line growth over the next two years between now and 2023. And that's compared to the brick and mortar index, which is only expected to grow top line at 9%.

And then it's even more extreme if we look at earnings, where online is supposed to grow something in the neighborhood of 70% compared to a number that is much lower for brick and mortar. So we do think that these companies have worked through the pandemic, both the boom and then, if you will, the bust. And we also think that e-commerce is really well built for the inflationary environment.

If a Walmart or a target wants to change prices, they have to send somebody through the store to go do that. Whereas the online companies, the digital-first companies have dynamic pricing algorithms that are adjusting on a minute-by-minute basis.

And so we've seen throughout the pandemic that online retail can maintain higher margins and has more stable profit margins than the brick and mortar, which also has labor costs, as well as the costs of-- the fixed costs of maintaining the stores. And so we think that dynamic pricing model of e-commerce really does set them up. Plus, there's some strong consensus growth ahead.

- Scott, I've been talking to a lot of consumers and some of them don't even have enough money to buy a bag of apples or a bag of bananas. Now, isn't the bottom line that retail over the next few months can see margin pressure, free cash flow pressure? You could see some store closures. You could see increased promos. Why go anywhere near anything as it pertains to investing in retail stocks? Why not just look elsewhere or just avoid the sector entirely?

SCOTT HELFSTEIN: So there is the tale of the data versus the anecdotes. And certainly, anecdotally, I agree with you. And I think we've seen there is some concern voiced not just in retail, but for profit margins overall. I would point out, last month, the difference between producer price index and the consumer price index was the highest on record going back to 1948.

So producers have been dealing with this, the retail stores, the industrial companies. They've been dealing with higher prices and trying to limit what they're passing on to consumers. And this has been going on for over a year. So I think a lot of these companies have adjusted to this inflationary reality and they're working very hard to manage their margins.

But the consumer is still incredibly strong. We saw a consumer expenditure number of year-over-year growth in April of 4.9%, which is well over the average of roughly about 2%. And over the last 20 years is the fourth highest reading. So consumers, despite higher prices at the pump and in the grocery store, are still increasing spending at a faster clip than pretty much any time in the last 20 years.

So the anecdotes certainly point out that there's high prices in pockets of the economy that can be painful. But both consumer spending and household balance sheets are still remarkably healthy.

- We'll leave it there for now. Scott Helfstein, ProShares Executive Director of Thematic Investing, good to see you.