equity analyst consumer may follow debt...
TRANSCRIPT
USA | Consumer
February 13, 2015
ConsumerGas Survey Says…Lift in Consumer SpendingMay Follow Debt Reduction & Savings
EQU
ITY R
ESEARC
H A
MERIC
AS
Randal J. Konik *Equity Analyst
(212) 708-2719 [email protected] Binder, CFA *
Equity Analyst(212) 284-4614 [email protected]
Andy Barish *Equity Analyst
(415) 229-1524 [email protected] Wiltamuth *
Equity Analyst(212) 708-2628 [email protected]
Alexander Slagle, CFA *Equity Analyst
(415) 229-1508 [email protected] Keller *Equity Associate
(212) 323-3954 [email protected] Barnes *
Equity Associate(212) 323-3928 [email protected]
John Gugliuzza *Equity Associate
(212) 707-6343 [email protected] Warburton *
Equity Associate(212) 323-3987 [email protected]
Christopher Mandeville *Equity Associate
(646) 805-5407 [email protected] Meyers *
Equity Associate(212) 323-7519 [email protected]
* Jefferies LLC
Key TakeawayGiven the recent drop in gas price, which could create up to $200 bn ($930/driver) in savings for consumers, we conducted a survey to assess the potentialimpact to retailers. We found that low gas prices in an improving economycould lead to increased discretionary spending in 2015, but debt repaymentand savings are likely to remain at the top of consumers' lists. Within oursectors, we believe GPS, CORE and HD are uniquely positioned to benefit themost.
Survey says... Our survey showed personal savings and debt repayment are likely toremain top priorities for consumers as gas savings accumulate, but retailers could startto see a meaningful benefit as 55% of survey participants expect to spend more inconsumer discretionary categories over the next six months, assuming gas prices remainlow. Interestingly, we also found that consumers plan on altering their spending patternswithin consumer categories over the next six months, with recent top categories restaurantsand groceries unlikely to pick up incremental spending share, whereas home goods/improvement, apparel/accessories and electronics are bound to see a ramp up in spendingshare, according to our survey.
Broadline & Hardline Retail: Our review of historical comp store sales performanceshows that environments of falling gas prices coupled with expanding GDP are rare overthe last 15 years. Nonetheless, the current environment of lower gas prices combined witha better economic backdrop could be favorable for retailers. The consumer survey resultsshow that consumers are currently using savings at the gas pump to pay down debt andsave, but some of it is also is being spent at retail. Initially, it appears that a greater proportionof the retail spending is being done in food and discount stores, but consumer intentionssuggest home related spending could be next if gas prices remain low.
Specialty Retail: We believe that economic improvement (including low gas prices)combined with pent up consumer demand and a potential shift in the fashion cyclecould fuel consumer appetite for specialty retail in 2015. We see opportunity for alphabeyond systemic recovery from retailers with the strongest brands, sharpest messagingand defensible competitive positioning (i.e., DECK, FOSL, GPS, KORS), especially GPS (Buy,$50 PT), given Old Navy caters to a demographic that should spend disproportionatelymore with savings from lower gas prices making up a larger percentage of their disposableincome.
Food/Drug Retail & Distribution: Given their positioning in the c-store and grocerychannels, we believe CORE (#2 c-store wholesaler; Buy, $76 PT) and KR (#1 grocer with~1,300 gas stations & ~800 c-stores; Hold, $66 PT) are best positioned to benefit from lowergas prices in the near term. Based on our survey, 60% of respondents displayed a propensityto spend a portion of gas savings at the location of purchase. Additionally, grocery ranked2nd amongst categories where lower gas prices could positively impact consumer spend inthe next 6 months. Surprisingly, even upper income consumers showed interest in spendinga portion of gas savings on grocery (possible modest benefit to nat/org grocers).
Restaurants: Given our survey results, it appears that restaurant spending has seen amodest boost in the past three months, although clearly not the top place on the list forusing savings at the pump. Although it is tough to tell current sector sales trends givenrelatively improved weather year-to-date 2015 vs. 2014, our survey results indicate full-service restaurants (casual dining) could still see some increased spending. This echoes whatwe have heard so far from many casual dining restaurant companies, but wonder if thestocks are a bit ahead of themselves given the moves they have had on anticipation of this.We rate DRI, BJRI, CAKE, TXRH, BLMN, BWLD Hold, but there is downside to our currenttarget prices.
Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 47 to 50 of this report.
Contents
EXECUTIVE SUMMARY.................................................................... 3 GAS PRICES AND MACROECONOMIC FACTORS ............................... 5
Lower Gas Price Impact on U.S. Gas Expenditure ........................... 13 BROADLINE/HARDLINE RETAIL .................................................... 17 SPECIALTY RETAIL ........................................................................ 27 FOOD/DRUG RETAIL & DISTRIBUTION .......................................... 34
The Convenience Store Channel ..................................................... 34 The Grocery Channel ....................................................................... 36
RESTAURANTS .............................................................................. 38 APPENDIX: SURVEY DETAILS ......................................................... 41
Demographic Data .......................................................................... 41 Survey Questions & Answers .......................................................... 42 About Google Consumer Surveys ................................................... 46
Consumer
February 13, 2015
page 2 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Executive Summary Gas prices at five year lows, driven mostly by a supply-driven oil cycle against an
improving US economic landscape, are likely to generate meaningful savings for
consumers that we believe could be between $120-$200 billion in the aggregate, or
about $560-$930 per driver. Further, with macroeconomic measures currently positive
(unemployment is falling, wages are rising, etc.), and in many instances accelerating,
consumers are in a unique, and positive position as trends in gas prices diverge from their
historical relationship with the economy.
We commissioned a proprietary survey using Google Consumer Surveys to assess
consumers’ intended spending behaviors regarding these gas savings. We surveyed 1,000
consumers that together reflect the demographic make-up of the US. We targeted
individuals who reported driving more than 10,000 miles annually (please see the
appendix for further detail on our survey).
Key takeaways from our survey showed personal savings and debt repayment are likely to
remain top priorities for consumers as gas savings accumulate. Survey findings also
suggest retailers could start to see a meaningful benefit as 55% of survey participants
expect to spend more in consumer discretionary categories over the next six months,
assuming gas prices remain low. Interestingly, we also found that consumers plan on
altering their spending patterns within consumer categories over the next six months,
with recent top categories, restaurants and groceries, unlikely to pick up incremental
spending share, whereas home goods/improvement, apparel/accessories and electronics
are bound to see a ramp up in spending share, according to our survey. Overall, we
believe our survey findings validate our initial assessment that lower gas prices combined
with an improving macro-economic backdrop could lead to an increase in consumer
spending and thus, be a meaningful tailwind for retailers in 2015.
Using our survey results in conjunction with additional sector-specific analysis we
examined in more detail the impact falling gas prices could have in 2015 for the following
Consumer sub-sectors: Broadline Retail, Specialty Retail, Food/Drug Retail & Distribution,
and Restaurants. Our findings were as follows:
Broadline & Hardline Retail: Our review of historical comp store sales
performance shows that environments of falling gas prices coupled with
expanding GDP are rare over the last 15 years. Nonetheless, the current
environment of lower gas prices combined with a better economic backdrop
could be favorable for retailers. The consumer survey results show that
consumers are currently using savings at the gas pump to pay down debt and
save, but some of it is also is being spent at retail. Initially, it appears that a
greater proportion of the retail spending is being done in food and discount
stores, but consumer intentions suggest home related spending could be next if
gas prices remain low.
Specialty Retail: We believe economic improvement combined with pent up
consumer demand and a potential shift in the fashion cycle could fuel consumer
appetite for specialty retail in 2015. Our survey results support this thesis given
respondents increased likelihood of spending gas savings on apparel/accessories
as the year progresses and savings from lower gas prices likely accumulate. We
see opportunity for alpha beyond systemic recovery from those retailers with the
strongest brands, sharpest messaging and defensible competitive positioning
(i.e., DECK, FOSL, GPS, and KORS) especially GPS (Buy $50), given Old Navy
caters to a demographic that should spend disproportionately more with
savings from lower gas prices making up a larger percentage of their disposable
income.
Consumer
February 13, 2015
page 3 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Food/Drug Retail & Distribution: Given their positioning in the c-store and
grocery channels (80% and 13%, respectively, of all U.S. fuel sales), we believe
CORE (#2 c-store wholesaler; Buy rated, $76 PT) and KR (#1 grocer with ~1,300
fuel stations & ~800 c-stores; Hold rated, $66 PT) are best positioned to benefit
from lower fuel prices in the near term. Based on survey results, 60% of
respondents displayed a propensity to spend some portion of fuel savings at the
location of purchase; this should translate into elevated in-store sales.
Additionally, grocery ranked 2nd amongst categories where lower fuel prices
could positively impact consumer spend in the next 6 months. That said, we feel
KR valuation fully reflects any near term fuel related upside while a more long-
tailed economic recovery and increased consumer confidence should continue
to benefit CORE. Surprisingly, even upper income consumers showed interest in
spending a portion of their gas savings on grocery (possible modest benefit to
Hold rated WFM and TFM, $56 and $39 PT, respectively).
Restaurants: Given our survey results, it appears that restaurant spending has
seen a modest boost in the past three months. Although it is tough to tell
current sector sales trends given relatively improved weather year-to-date 2015
vs. 2014, survey results indicate full-service restaurants (casual dining) could still
see some increased spending. This echoes what we have heard so far from many
casual dining restaurant companies, but wonder if the stocks are a bit ahead of
themselves given the moves they have had on anticipation of this. We rate DRI,
BJRI, CAKE, TXRH, BLMN, BWLD Hold, but there is downside to our current
target prices.
Consumer
February 13, 2015
page 4 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Gas Prices and Macroeconomic Factors Supply-Driven Gas Price Decline Presents a Unique Opportunity for
Consumers. Retail gas prices have recently been experiencing some of the largest year-
over-year weekly declines in the past 10 years and certainly the largest decreases since the
economy started to recover from the Great Recession. On a TTM basis, gas prices have
been falling for 16 months (peak was February 2013), but the more recent period shows a
steeper price deceleration. Historically, declining gas prices have coincided with
deteriorating economic conditions as gas prices responded to demand. However, gas
prices have more recently been driven down by supply, which, as we show below,
presents a unique opportunity for consumers and that could translate to better sales for
retailers.
Chart 1: Weekly U.S. Retail Gas Prices
Source: U.S. Energy Information Administration
Chart 2: TTM Volume Weighted Monthly U.S. Gas Price
Source: U.S. Energy Information Administration, Jefferies
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Weekly Gas Price April '11 - July '14 Avg. Price y/y
$3.64
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Jan
-97
Sep
-97
May-
98
Jan
-99
Sep
-99
May-
00
Jan
-01
Sep
-01
May-
02
Jan
-03
Sep
-03
May-
04
Jan
-05
Sep
-05
May-
06
Jan
-07
Sep
-07
May-
08
Jan
-09
Sep
-09
May-
10
Jan
-11
Sep
-11
May-
12
Jan
-13
Sep
-13
May-
14
Retail Gas Prices (TTM Vol. Weighted) Retail Gas Prices (TTM Vol. Weighted) (y/y)
22 months
15 months
15 months 16 months
Weekly gas prices averaged $3.64
per gallon during the plateau
between April 2011 and July 2014.
This was off only slightly from the
monthly peak price of $3.69 in
February 2013.
On a trailing 12 months volume
weighted basis, gas prices have
experienced the longest period of
consecutive months with a y/y price
decrease in the past 15 years. If
prices stay at current levels, the
decline in the coming months will
get steeper.
Consumer
February 13, 2015
page 5 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 3: Personal Savings as % of Disposable Income
Source: Bureau of Economic Analysis
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Personal Savings as a % of DPI
Our survey suggests that savings
rates are likely to increase with falling
gas prices. While this has not fully
materialized, November savings rate
ticked up.
Consumer
February 13, 2015
page 6 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
We are seeing a divergence in historical relationships. Historically, gas prices
have followed many other measures of economic health such as GDP and weekly
earnings. However, we believe that these historical relationships have been largely created
by demand, where, for example, falling demand from weaker economic activity causes
prices to fall. With falling gas prices currently being driven by supply, we are seeing the
relationship diverge. Looking at the relationship between weekly earnings growth and gas
prices, one can see a clear divergence in recent trends creates a unique tailwind for
consumers. There haven’t been too many historical periods where a prolonged
decelerating trend in gas prices has coincided with an accelerating trend in weekly wages.
Chart 4: U.S. Retail Gas Prices and Nominal GDP
Source: U.S. Energy Information Administration, Bureau of Economic Analysis
Chart 5: U.S. Retail Gas Prices and Weekly Earnings
Source: U.S. EIA, Bureau of Labor Statistics
Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
No
min
al G
DP
(y/
y)
Ga
s P
rice
(y
/y
)
Retail Gas Prices (y/y) Nominal GDP
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
We
ek
ly E
arn
ing
ns (y
/y
)
Ga
s P
rice
(y
/y
)
Retail Gas Prices (y/y) Avg Weekly Earnings: Prod & Nonsupervisory (y/y)
Recent data is bucking historical
trends between GDP and retail gas
price growth.
The accelerating trend in weekly
earnings while gas prices decline is a
rare event. Combined, these two
trends create a unique tailwind for
consumers.
Consumer
February 13, 2015
page 7 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 6: Gas Prices and Non-Farm Payrolls
Source: U.S. EIA, Bureau of Labor Statistics
Chart 7: Box Office Movie Sales vs. Retail Gas Prices
Source: U.S. EIA, BoxOfficeMojo.com
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Dec-
97
Sep
-98
Jun
-99
Mar-
00
Dec-
00
Sep
-01
Jun
-02
Mar-
03
Dec-
03
Sep
-04
Jun
-05
Mar-
06
Dec-
06
Sep
-07
Jun
-08
Mar-
09
Dec-
09
Sep
-10
Jun
-11
Mar-
12
Dec-
12
Sep
-13
Jun
-14
Ga
s Pric
e y
/y
Un
em
plo
ym
en
t R
ate
Non Farm Payrolls (TTM Avg) (y/y) Retail Gas Prices (TTM Vol. Weighted) (y/y)
Correlation: 43.8%Correlation:
-70.5%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Dec-
97
Sep
-98
Jun
-99
Mar-
00
Dec-
00
Sep
-01
Jun
-02
Mar-
03
Dec-
03
Sep
-04
Jun
-05
Mar-
06
Dec-
06
Sep
-07
Jun
-08
Mar-
09
Dec-
09
Sep
-10
Jun
-11
Mar-
12
Dec-
12
Sep
-13
Jun
-14
PC
E-G
as/
Driv
er (y
/y
)
Bo
x O
ffic
e S
ale
s/P
op
(y
/y
)
Box Office ($ Million)/Pop (TTM) (y/y) PCE-Gas/Driver (y/y)
Correlation: -54.9%Correlation:
24.6%
Non-farm payrolls have been on an
accelerating trend since gas price
increases started to decelerate and
then decline. We have not seen a
prolonged period with this
phenomenon in the last 16 years.
Historically gas price growth has
negatively correlated with growth in
box office movie revenues.
However, the most recent slide in
gas prices has coincided with lower
box office growth, indicating that
falling gas prices are not leading to
higher consumer spending on
movies.
Consumer
February 13, 2015
page 8 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Gas prices likely to keep consumer confidence on a positive trend, which is
good for retail. While we are seeing some historical relationships diverge as it pertains
to gas prices, consumer confidence continues to track very closely with energy’s share of
personal expenditure. Given the strong relationship between retail sales and consumer
confidence, we expect that as the share of consumer energy expenditures decreases, retail
sales could benefit.
Chart 8: Consumer Confidence and Energy’s Share of Personal Expenditure
Source: University of Michigan, Bureau of Economic Analysis, Jefferies Note: right axis is flipped for illustrative purposes
Chart 9: Consumer Confidence and Retail Sales (ex auto and gas)
Source: University of Michigan, Census Bureau
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.00.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Co
nsu
me
r Co
nfid
en
ce
En
erg
y %
of
PC
E (
y/
y)
Energy Goods and Services as a % of PCE Michigan Consumer Confidence
Correlation: -65.2%
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Co
nsu
me
r Co
nfid
en
ce
Re
tail
&F
oo
d (
ex
Au
to a
nd
Ga
s) (
y/
y)
Retail Food& Drink (ex Auto and Gas) (SA, TTM) (y/y)
Michigan Consumer Confidence
Correlation: 61.3%
Consumer
February 13, 2015
page 9 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Falling unemployment continues to be a tailwind to retail sales. We expect the
historical relationship between the change in employed individuals and retail sales to hold
in this period of falling gas prices. Increasing employment gains is likely to continue to
provide a tailwind to retail sales. Historically, changes in unemployment have been
negatively correlated with gas prices, however as gas prices are now supply driven, this
relationship has actually reversed. The combination of falling gas prices and rising
employment could boost overall retail sales growth in CY 2015, but our consumer survey
also suggests that savings at the pump are being used to pay down debt and save.
Chart 10: Employment and Retail Sales
Source: U.S. BLS, Census Bureau, Jefferies
Chart 11: Change to Unemployment and Gas Prices
Source: U.S. BLS, U.S. EIA, Jefferies
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
1Q
98
1Q
99
1Q
00
1Q
01
1Q
02
1Q
03
1Q
04
1Q
05
1Q
06
1Q
07
1Q
08
1Q
09
1Q
10
1Q
11
1Q
12
1Q
13
1Q
14
% C
hg
. Em
plo
ym
en
t
% C
hg
. N
om
ina
l R
eta
il S
ale
s
Nominal Retail Sales
Employment
Correlation: 74.4%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%-200 bps
-100 bps
0 bps
100 bps
200 bps
300 bps
400 bps
500 bps
Dec-
97
Sep
-98
Jun
-99
Mar-
00
Dec-
00
Sep
-01
Jun
-02
Mar-
03
Dec-
03
Sep
-04
Jun
-05
Mar-
06
Dec-
06
Sep
-07
Jun
-08
Mar-
09
Dec-
09
Sep
-10
Jun
-11
Mar-
12
Dec-
12
Sep
-13
Jun
-14
Ga
s Pric
e y
/y
Un
em
plo
ym
en
t R
ate
(y
/y
bp
s)
Unemployment Rate (y/y bps) Retail Gas Prices (TTM Avg.) (y/y)
Correlation: -49.0%Correlation:
25.2%
Consumer
February 13, 2015
page 10 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Consumers are driving more but spending less on gas. Since peaking at 3.64% in
October 2012, gasoline’s share of personal consumption expenditure has been on a
downward trend, though the slope has steepened in recent months. Historically, as the
share that consumers spend on gasoline declines, miles driven have increased. This
relationship continues to hold true as miles driven (on a trailing 12 month basis) has
experienced the longest continuous period of growth since the Great Recession,
beginning around the time that TTM gas prices started its period of decline.
Chart 12: Miles Driven and Gas Prices
Source: U.S. DOT, U.S. EIA, Jefferies
Chart 13: Volume Gas Consumption and Miles Driven
Source: U.S. DOT, U.S. EIA
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
TT
M M
iles (y
/y
)
Ga
s P
Ric
es
(y/
y)
Retail Gas Prices (TTM Vol. Weighted) (y/y) Miles Driven (TTM) (y/y)
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
Gallons (Millions) (y/y) (TTM) Miles Driven (TTM) (y/y)
Miles driven has experienced a fairly
consistent positive and accelerating
trend since around the time that gas
prices decreased on a TTM volume
weighted basis.
Gas volume growth remains positive
though has been decelerating. Both
volume of gas consumed and miles
driven are experiencing growth not
seen since before the Great
Recession.
Consumer
February 13, 2015
page 11 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 14: Personal Consumption (ex Food and Energy) and Retail Gas Prices
Source: U.S. Energy Information Administration, Bureau of Economic Analysis
Chart 15: Gas Price Impact on Gas Station Fuel Sales
Source: U.S. EIA, U.S. Census Bureau, Jefferies
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Dec-
04
May-
05
Oct
-05
Mar-
06
Au
g-0
6
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec-
09
May-
10
Oct
-10
Mar-
11
Au
g-1
1
Jan
-12
Jun
-12
No
v-1
2
Ap
r-1
3
Sep
-13
Feb
-14
Jul-
14
Dec-
14
PCE (ex Food and Energy)(SAAR) (y/y) Retail Gas Prices (y/y)
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Retail Gas Stations (SA) (y/y) (TTM) Retail Gas Prices (TTM Vol. Weighted) (y/y)
Ex Food and Energy consumption
expenditures have accelerated as gas
prices have declined.
Falling gas prices are showing up in
lower retail fuel sales at gas stations.
This further demonstrates that
increased driving and gas volumes
are not offsetting falling prices.
Consumer
February 13, 2015
page 12 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Lower Gas Price Impact on U.S. Gas Expenditure Depending on certain assumptions and methods, our analysis shows that falling gas
prices could free up roughly $120-200+ billion for consumers. We expect some of this to
be used for debt pay-down and savings, but our consumer survey also suggest some will
be spent at retail as we detail in this report.
Should gas prices remain at recent levels throughout the year, with stable miles driven,
the total gas expenditure savings could reach $200 billion. Using a top-down approach
that also incorporates government gas price estimates, we find that lower gas prices
would result in between $110-$130 billion of aggregate consumer savings.
Using government gas price estimates for 2015 in our bottom-up approach, we find that
the average driver will save about $740 this year, equating to about $160 billion of
aggregate consumer savings. This figure would decrease slightly should drivers decide to
drive more in response to lower gas prices.
Below, we employed three methods to estimate the impact that falling gas prices could
have on consumer gas expenditures.
Method 1:
Chart 16: Personal Consumption Expenditure (PCE) on Gasoline and Motor
Oil
Source: Bureau of Economic Analysis, Jefferies estimates
* - Weighted average by historic volume seasonality
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Ga
s Pric
e
PC
E -
Ga
s ($
Bn
)
PCE - Gasoline and Motor Oil (SAAR) PCE - Gasoline (SAAR) (Est. $254 Bn)
PCE - Gasoline and Motor Oil Avg. (SAAR) Retail Gas Prices
EIA 2015 Gas Price {$2.42)
$120 Bn
$ Bn
PCE - Gasoline and Motor Oil Avg. (Apr. '11 - July '14) (SAAR) $374
EIA 2015 Estimated Gas Price (Avg.*) $2.42
Implied 2015 PCE - Gasoline $254
Implied Savings $120
Our estimates suggest that at EIA-
projected gas prices, consumers
would spend about $120 billion less
on gasoline in 2015 vs. the average
annual gas expenditure between
August 2011 and July 2014.
Consumer
February 13, 2015
page 13 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
As part of our first method to estimate gas expenditure savings, we tested the sensitivity
of savings to gas price and unit consumption levels (a proxy for gas volume). The table
below shows that, a 20 cent rise or fall in gas price combined with a small change in gas
volume consumption impacts savings by about $20 billion in either direction from where
government 2015 gas price forecast (weighted average of $2.42) would suggest.
Chart 17: PCE-Gas Consumption Savings Sensitivity Table
Source: Jefferies estimates
2015 Average Gas Price
$120 $2.00 $2.20 $2.40 $2.60 $2.80 $3.00 $3.20
102 $170 $149 $129 $109 $88 $68 $47
104 $166 $145 $124 $103 $83 $62 $41
106 $162 $141 $119 $98 $77 $56 $35
108 $158 $136 $115 $93 $71 $50 $28
110 $154 $132 $110 $88 $66 $44 $22
112 $150 $127 $105 $83 $60 $38 $15PC
E-G
as /
Gas
Pri
ce
Consumer
February 13, 2015
page 14 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Method 2:
A more detailed “top-down” approach implies that the consumers may save
$110-$130 billion at the pump in 2015. We estimated the impact of gas savings by
assuming that gas consumption volume is constant y/y and the only variable in expense
is the y/y change in gas prices. Applying the y/y gas price change to gas PCE equates to
between $110 to $130 billion of annualized cash savings for consumers, using EIA
estimates for gas prices over the next three quarters.
Chart 18: Energy Inflation Analysis – “Top-Down” Approach
Source: Bureau of Economic Analysis, Bureau of Economic Analysis, Jefferies
Analysis Gasoline Fuel Oil Electricity Natural Gas Energy PCE
Price Last Year (4Q13) 336.70$ 372.60$ 12.01$ 9.90$
EIA Estimate Dec-14 296.30$ 330.90$ 12.35$ 10.39$
Y/Y Change -12.00% -4.07% 2.83% 4.95%
Estimated Ann. PCE (consumption fixed) 323,513$ 37,892$ 181,383$ 43,848$
Delta in Ann. Dollars (mn) (44,110)$ (1,608)$ 4,994$ 2,068$ (38,656)$
Impact on 4Q14 Retail Sales* 120 bps 4 bps -14 bps -6 bps 105 bps
Price Last Year (1Q14) 348.00$ 397.20$ 11.90$ 9.82$
EIA Estimate Mar-15 222.00$ 273.90$ 12.23$ 9.15$
Y/Y Change -36.21% -11.29% 2.77% -6.82%
Estimated Ann. PCE (consumption fixed) 231,843$ 38,767$ 194,155$ 58,596$
Delta in Ann. Dollars (mn) (131,586)$ (4,933)$ 5,239$ (4,291)$ (135,571)$
Impact on 1Q15 Retail Sales* 356 bps 13 bps -14 bps 12 bps 367 bps
Impact holding gas prices at current levels: 340 bps 13 bps -14 bps 12 bps 351 bps
Price Last Year (2Q14) 375.00$ 381.50$ 12.73$ 13.11$
EIA Estimate Jun-15 242.80$ 256.20$ 12.79$ 11.58$
Y/Y Change -35.25% -11.94% 0.47% -11.67%
Estimated Ann. PCE (consumption fixed) 240,942$ 33,417$ 169,027$ 56,138$
Delta in Ann. Dollars (mn) (131,188)$ (4,532)$ 793$ (7,417)$ (142,345)$
Impact on 2Q15 Retail Sales* 352 bps 12 bps -2 bps 20 bps 382 bps
Impact holding gas prices at current levels: 393 bps 12 bps -2 bps 20 bps 423 bps
Price Last Year (3Q14) 358.20$ 369.00$ 13.00$ 16.92$
EIA Estimate Sep-15 250.70$ 259.70$ 13.05$ 15.75$
Y/Y Change -30.01% -10.77% 0.38% -6.91%
Estimated Ann. PCE (consumption fixed) 258,872$ 32,490$ 168,637$ 45,322$
Delta in Ann. Dollars (mn) (111,004)$ (3,922)$ 646$ (3,367)$ (117,647)$
Impact on 3Q15 Retail Sales* 296 bps 10 bps -2 bps 9 bps 314 bps
Impact holding gas prices at current levels: 359 bps 10 bps -2 bps 9 bps 377 bps
Impact on Fwd Yr Retail Sales* 281 bps 10 bps -8 bps 9 bps 292 bps
Impact holding gas prices at current levels: 303 bps 10 bps -8 bps 9 bps 314 bps
Consumer
February 13, 2015
page 15 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Method 3:
A “bottom-up” method shows that consumers would save about $180 billion;
at current levels, savings could rise to about $190 billion should they revert
to January prices.
Chart 19: Implied Savings from Lower Gas Prices – “Bottom-Up” Approach
Source: EIA, DOT, Jefferies estimates
* - Weighted average by historic volume seasonality
Chart 20: Implied Gas Expenditure Savings - Miles Driven and Gas Price
Source: Jefferies estimates
Current 2013
Average Annual Miles 14,026 13,936
miles/weekly 270 268
Average MPG 22 22
gallons/week 12.2 12.3
Average $ Gallon (Jan '15) $2.21 $3.58
Current Weekly Price $2.28
EIA Average* 2015 Price $2.42
Weekly Expenditure @ Jan '15 Price $27.03 $43.81
Weekly Expenditure @ Current Price $27.86
Weekly Expenditure @ Avg 2015 EIA Price $29.61
Implied Savings Weekly Annually $ Bn Save
Implied Savings @ Jan '15 Price $16.78 $873 $187
Implied Savings @ Current Price $15.95 $829 $178
Implied Savings @ Avg 2015 EIA Price $14.20 $739 $158
Average Annual Gas Price
$178 $2.00 $2.20 $2.40 $2.60 $2.80 $3.00 $3.20 $3.40 $3.60
13,500 $225 $199 $173 $147 $121 $94 $68 $42 $16
13,600 $224 $197 $171 $144 $118 $91 $65 $38 $12
13,700 $222 $195 $168 $142 $115 $88 $62 $35 $9
13,800 $220 $193 $166 $139 $112 $86 $59 $32 $5
13,900 $218 $191 $164 $137 $110 $83 $56 $29 $2
14,000 $216 $189 $161 $134 $107 $80 $52 $25 -$2
14,100 $214 $186 $159 $132 $104 $77 $49 $22 -$5
14,200 $212 $184 $157 $129 $101 $74 $46 $19 -$9
14,300 $210 $182 $154 $127 $99 $71 $43 $15 -$12
14,400 $208 $180 $152 $124 $96 $68 $40 $12 -$16
14,500 $206 $178 $150 $121 $93 $65 $37 $9 -$19
Mil
es/
Ye
ar
Dri
ve
n
A “bottom-up” approach to
estimating impact from lower gas
prices using government projections
implies about $180 billion of
consumer savings.
Depending on how low gas prices
are and how much gas prices impact
miles driven, our “bottom-up”
analysis shows that savings could
reach close to $200 billion.
Consumer
February 13, 2015
page 16 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Broadline/Hardline Retail –
Cheaper Gas + Healthy Macro is Rare But Could Still be Favorable for Sales Our review of historical comp store sales performance shows that
environments of falling gas prices coupled with expanding GDP are rare over
the last 15 years. Nonetheless, the current envrionment of lower gas prices
compined with a better economic backdrop could be favorable for retailers.
The consumer survey results show that consumers are currently using savings
at the gas pump to pay down debt and save, but some of it is also being spent
at retail. Initially, it appears that a greater proportion of the retail spending
is being done in food and discount stores, but consumer intentions suggest
home related spending could be next if gas prices remain low.
Walmart: In periods of sharply declining gas prices, WMT comp store sales tend to
improve over prior 12 month periods, but historically that has been during softer
economic backdrops when a consumer trade-down shift may have been occurring. In
periods of sharply rising gas prices, Walmart U.S. saw more instances where it
underperformed its prior 12 month average.
Target: During periods of sharp sequential declines in gas prices, Target’s relative comp
performance has been mixed. Similarly, in periods of sharply rising gas prices, Target has
seen periods of mixed performance relative to the prior 12 month average. Hence, it
would appear to us that other forces, including economic forces, may have more to do
with Target’s comp outperformance or underperformance than gas prices.
Kohl’s: Kohl’s has seen mixed comp store sales performance across periods where gas
prices showed sharp sequential increases and decreases. As a result, it would appear that
its sales performance is influenced more by economic cycles and other factors such as
merchandising.
Dollar stores. Over time, the relationship between dollar store comp store sales and gas
prices is not strong, but they have done well in periods when consumers are under
pressure and other retailers are seeing weakness.
HD, LOW, BBY: Hardline retailers such as The Home Depot, Lowe’s, and Best Buy do
not see strong relationships between gas prices and comp store sales.
Consumer
February 13, 2015
page 17 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Walmart: As can be seen below, there have been two periods since fiscal 2002 during
which we saw significant sequential gas price declines. During those periods, Walmart
U.S. outperformed its prior 12 month average comp, arguing for a sequential
improvement in comp store sales in the current period of declining gas prices. The
market already appears to be anticipating that as consensus estimates are modeling an
uptick and shares have rallied since oil prices have declined. We would note, however,
that during those prior periods the economy was soft, so the trade down affect may have
been a more important factor. In periods of sharply rising gas prices, Walmart U.S. saw
more instances where it underperformed its prior 12 month average.
Chart 21: Walmart U.S. SSS In Volatile Gas Periods
Source: Jefferies, BEA, EIA and company information
Chart 22: Walmart U.S. SSS vs. Gas Prices y/y%
Note: left axis is flipped for illustrative purposes; Correlation = -17.6% Source: EIA and company information
Period (Fiscal)
Avg GDP
Growth
Gas Price
Move
Gas Price
y/y% Avg
WMT U.S.
SSS Avg
∆ From Prior
12 mo Avg
Comp
Q302-Q402 -0.1% -28% -14.6% 7.0% 2.8%
Q105-Q306 3.2% 76% 21% 3.0% -0.8%
Q107-Q207 3.0% 29% 26% 2.7% -0.4%
Q108-Q208 1.7% 34% 4% 0.6% -1.5%
Q209 2.0% 22% 29% 4.6% 3.0%
Q309-Q409 -5.0% -52% -6% 2.7% 0.2%
Q110-Q310 -1.6% 36% -34% 0.7% -2.5%
Q411-Q212 1.3% 36% 25% -1.3% 0.4%
Q315-Q415 3.8% -30% -13%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Q1
97
A
Q4
97
A
Q3
98
A
Q2
99
A
Q1
00
A
Q4
00
A
Q3
01
A
Q2
02
A
Q1
03
A
Q4
03
A
Q3
04
A
Q2
05
A
Q1
06
A
Q4
06
A
Q3
07
A
Q2
08
A
Q1
09
A
Q4
09
A
Q3
10
A
Q2
11
A
Q1
12
A
Q4
12
A
Q3
13
A
Q2
14
A
Q1
15
A
Q4
15
A
Gas y/y% (left axis) WMT U.S. SSS (right axis)
In periods of sharply declining gas
prices, WMT comp store sales tend to
improve over prior 12 month periods,
but historically that has been during
softer economic backdrops when a
consumer trade-down shift may have
been occurring.
Consumer
February 13, 2015
page 18 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Target: During periods of sharp sequential declines in gas prices, Target’s relative comp
performance has been mixed. During fiscal Q302-Q402, comp store sales outperformed
its prior 12 month average comp, but in fiscal Q309-Q409 it underperformed and more
recently we saw outperformance again. However, Q4 of fiscal 2015 was up against the
data breach a year ago, so there were extenuating circumstances. On a 2-year basis, Q4
comps look like they will slow from Q3 if management’s recent guidance is considered.
In periods of sharply rising gas prices, Target has a seen periods of mixed performance
relative to the prior 12 month average. Hence, it would appear to us that other forces,
including economic forces, may have more to do with Target’s comp outperformance or
underperformance than with gas prices. That said, we think the combination of an
improving macro backdrop and lower gas prices should bode well for Target’s core
customer.
Chart 23: Target SSS In Volatile Gas Periods
* based on mgmt updated guidance for 3% in Q4 Source: Jefferies, BEA, EIA and company information
Chart 24: Target SSS vs. Gas Prices y/y%
Note: left axis is flipped for illustrative purposes; Correlation = 18.3% Source: EIA and company information
Period (Fiscal)
Avg GDP
Growth
Gas Price
Move
Gas Price
y/y% Avg TGT SSS Avg
∆ From Prior
12 mo Avg
Comp
Q302-Q402 -0.1% -28% -14.6% 4.6% 1.5%
Q105-Q306 3.2% 76% 21% 5.7% 1.6%
Q107-Q207 3.0% 29% 26% 4.9% -0.9%
Q108-Q208 1.7% 34% 4% 4.6% -0.2%
Q209 2.0% 22% 29% -0.4% -2.4%
Q309-Q409 -5.0% -52% -6% -4.6% -5.3%
Q110-Q310 -1.6% 36% -34% -3.8% -1.3%
Q411-Q212 1.3% 36% 25% 2.8% 1.1%
Q315-Q415 3.8% -30% -13% 2.1%* 2.6%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Q1
97
A
Q4
97
A
Q3
98
A
Q2
99
A
Q1
00
A
Q4
00
A
Q3
01
A
Q2
02
A
Q1
03
A
Q4
03
A
Q3
04
A
Q2
05
A
Q1
06
A
Q4
06
A
Q3
07
A
Q2
08
A
Q1
09
A
Q4
09
A
Q3
10
A
Q2
11
A
Q1
12
A
Q4
12
A
Q3
13
A
Q2
14
A
Q1
15
A
Q4
15
A
Gas y/y% (left axis) TGT SSS (right axis)
During periods of sharp sequential
declines in gas prices, Target’s
relative comp performance has been
mixed. Similarly, in periods of
sharply rising gas prices, Target has
seen periods of mixed performance
relative to the prior 12 month comp
average.
Consumer
February 13, 2015
page 19 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Kohl’s: Similar to Target, Kohl’s has seen mixed comp store sales performance across
periods where gas prices showed sharp sequential increases and decreases. As a result, it
would appear that its sales performance is influenced more by economic cycles and other
factors such as merchandising.
Chart 25: Kohl’s SSS In Volatile Gas Periods
Source: Jefferies, BEA, EIA and company information
Chart 26: Kohl’s SSS vs. Gas Prices y/y%
Note: left axis is flipped for illustrative purposes; Correlation = 0.1% Source: EIA and company information
Period (Fiscal)
Avg GDP
Growth
Gas Price
Move
Gas Price
y/y% Avg KSS SSS Avg
∆ From Prior
12 mo Avg
Comp
Q302-Q402 -0.1% -28% -14.6% 8.6% 0.4%
Q105-Q306 3.2% 76% 21% 1.9% 3.1%
Q107-Q207 3.0% 29% 26% 6.2% 2.5%
Q108-Q208 1.7% 34% 4% 2.6% -3.7%
Q209 2.0% 22% 29% -4.6% -1.6%
Q309-Q409 -5.0% -52% -6% -8.0% -3.5%
Q110-Q310 -1.6% 36% -34% -1.4% 5.4%
Q411-Q212 1.3% 36% 25% 2.5% -2.1%
Q315-Q415 3.8% -30% -13% 1.0% 3.0%
-15%
-10%
-5%
0%
5%
10%
15%-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Q1
97
A
Q3
97
A
Q1
98
A
Q3
98
A
Q1
99
A
Q3
99
A
Q1
00
A
Q3
00
A
Q1
01
A
Q3
01
A
Q1
02
A
Q3
02
A
Q1
03
A
Q3
03
A
Q1
04
A
Q3
04
A
Q1
05
A
Q3
05
A
Q1
06
A
Q3
06
A
Q1
07
A
Q3
07
A
Q1
08
A
Q3
08
A
Q1
09
A
Q3
09
A
Q1
10
A
Q3
10
A
Q1
11
A
Q3
11
A
Q1
12
A
Q3
12
A
Q1
13
A
Q3
13
A
Q1
14
A
Q3
14
A
Q1
15
A
Q3
15
A
Gas y/y% (left axis) KSS SSS (right axis)
Consumer
February 13, 2015
page 20 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Dollar Stores: Dollar General and Family Dollar outperformed in the Q302-Q402
period, but the periods of the best relative performance came when there were
pronounced pressures on the consumer. In 2Q09, gas prices were up over 20% on both
a sequential and y/y basis. At the same time, GDP growth was softening. Dollar General
showed a 10.1% SSS increase, 7 points above its prior 12 month average, while Family
Dollar reported a 5.6% increase, which was well ahead of the prior 12 month average of
flat. Dollar Tree also outperformed its recent trend in that period. Here again, it does not
appear that sharp declines in gas prices necessarily help the dollar stores as other factors
have a bigger influence.
Chart 27: Dollar Stores SSS In Volatile Gas Periods
Source: Jefferies, BEA, EIA and company information
Chart 28: Dollar Stores SSS vs. Gas Prices y/y%
Note: left axis is flipped for illustrative purposes DG Correlation = -39.5%; FDO Correlation = -10.7%; DLTR Correlation = -9.1% Source: EIA and company information
Period (Fiscal)
Avg GDP
Growth
Gas Price
Move
Gas Price y/y%
Avg
DG SSS
Avg
∆ From
Prior 12
mo Avg
Comp
FDO SSS
Avg
∆ From
Prior 12
mo Avg
Comp
DLTR SSS
Avg
∆ From
Prior 12
mo Avg
Comp
Q302-Q402 -0.1% -28% -14.6% 7.1% 3.0% 6.3% 2.2% 0.7% -0.5%
Q105-Q306 3.2% 76% 21% 3.3% -0.7% 2.1% -1.4% -0.8% -3.5%
Q107-Q207 3.0% 29% 26% 2.4% 0.2% 4.3% 2.3% 4.1% 5.4%
Q108-Q208 1.7% 34% 4% 2.7% -0.5% 1.3% -1.2% 5.1% 0.7%
Q209 2.0% 22% 29% 10.1% 7.1% 5.6% 5.6% 6.5% 4.6%
Q309-Q409 -5.0% -52% -6% 10.0% 5.2% 4.3% 3.1% 4.2% 1.8%
Q110-Q310 -1.6% 36% -34% 10.4% 1.5% 3.2% -0.4% 7.5% 3.3%
Q411-Q212 1.3% 36% 25% 5.0% -0.8% 5.1% -0.8% 5.2% -1.9%
Q315-Q415 3.8% -30% -13%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Q1
97
A
Q3
97
A
Q1
98
A
Q3
98
A
Q1
99
A
Q3
99
A
Q1
00
A
Q3
00
A
Q1
01
A
Q3
01
A
Q1
02
A
Q3
02
A
Q1
03
A
Q3
03
A
Q1
04
A
Q3
04
A
Q1
05
A
Q3
05
A
Q1
06
A
Q3
06
A
Q1
07
A
Q3
07
A
Q1
08
A
Q3
08
A
Q1
09
A
Q3
09
A
Q1
10
A
Q3
10
A
Q1
11
A
Q3
11
A
Q1
12
A
Q3
12
A
Q1
13
A
Q3
13
A
Q1
14
A
Q3
14
A
Q1
15
A
Q3
15
A
Gas y/y% (left axis) FDO SSS (right axis) DG SSS (right axis) DLTR SSS (right axis)
Over time the relationship between
dollar store SSS and gas prices is not
strong, but they have done well in
periods when consumers are under
pressure and other retailers are
seeing weakness.
Consumer
February 13, 2015
page 21 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
The Home Depot: Home Depot has seen mixed comp store sales performance across
periods where gas prices showed sharp sequential increases and decreases. As a result, it
would appear that its sales performance is influenced by other factors including economic
and housing cycles, merchandising and store execution.
Chart 29: Home Depot SSS In Volatile Gas Periods
Source: Jefferies, BEA, EIA and company information
Chart 30: Home Depot SSS vs. Gas Prices y/y%
Note: left axis is flipped for illustrative purposes; Correlation = 10.7% Source: EIA and company information
Period (Fiscal)
Avg GDP
Growth
Gas Price
Move
Gas Price
y/y% Avg HD SSS Avg
∆ From Prior
12 mo Avg
Comp
Q302-Q402 -0.1% -28% -14.6% 2.5% 2.0%
Q105-Q306 3.2% 76% 21% 4.5% 0.5%
Q107-Q207 3.0% 29% 26% 0.0% -3.7%
Q108-Q208 1.7% 34% 4% -6.4% -3.5%
Q209 2.0% 22% 29% -7.9% -1.4%
Q309-Q409 -5.0% -52% -6% -10.7% -3.4%
Q110-Q310 -1.6% 36% -34% -8.5% 0.4%
Q411-Q212 1.3% 36% 25% 2.5% 0.3%
Q315-Q415 3.8% -30% -13%
-15%
-10%
-5%
0%
5%
10%
15%-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Q1
97
A
Q3
97
A
Q1
98
A
Q3
98
A
Q1
99
A
Q3
99
A
Q1
00
A
Q3
00
A
Q1
01
A
Q3
01
A
Q1
02
A
Q3
02
A
Q1
03
A
Q3
03
A
Q1
04
A
Q3
04
A
Q1
05
A
Q3
05
A
Q1
06
A
Q3
06
A
Q1
07
A
Q3
07
A
Q1
08
A
Q3
08
A
Q1
09
A
Q3
09
A
Q1
10
A
Q3
10
A
Q1
11
A
Q3
11
A
Q1
12
A
Q3
12
A
Q1
13
A
Q3
13
A
Q1
14
A
Q3
14
A
Q1
15
A
Q3
15
A
Gas y/y% (left axis) HD SSS
Consumer
February 13, 2015
page 22 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Lowe’s: Similar to The Home Depot, Lowe’s has seen mixed comp store sales
performance across periods where gas prices showed sharp sequential increases and
decreases. It does appear that sales underperform more than HD in sharply rising gas
price envirionments, but that has often time been during softer patches in the economy.
Chart 31: Lowe’s SSS In Volatile Gas Periods
Source: Jefferies, BEA, EIA and company information
Chart 32: Lowe’s SSS vs. Gas Prices y/y%
Note: left axis is flipped for illustrative purposes; Correlation = 13.0% Source: EIA and company information
Period (Fiscal)
Avg GDP
Growth
Gas Price
Move
Gas Price
y/y% Avg
LOW SSS
Avg
∆ From Prior
12 mo Avg
Comp
Q302-Q402 -0.1% -28% -14.6% 5.7% 6.8%
Q105-Q306 3.2% 76% 21% 6.2% -0.4%
Q107-Q207 3.0% 29% 26% 4.5% -1.6%
Q108-Q208 1.7% 34% 4% -4.5% -4.4%
Q209 2.0% 22% 29% -5.3% 0.4%
Q309-Q409 -5.0% -52% -6% -7.9% -1.5%
Q110-Q310 -1.6% 36% -34% -7.9% -0.5%
Q411-Q212 1.3% 36% 25% -0.8% -1.5%
Q315-Q415 3.8% -30% -13%
-15%
-10%
-5%
0%
5%
10%
15%-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Q1
97
A
Q3
97
A
Q1
98
A
Q3
98
A
Q1
99
A
Q3
99
A
Q1
00
A
Q3
00
A
Q1
01
A
Q3
01
A
Q1
02
A
Q3
02
A
Q1
03
A
Q3
03
A
Q1
04
A
Q3
04
A
Q1
05
A
Q3
05
A
Q1
06
A
Q3
06
A
Q1
07
A
Q3
07
A
Q1
08
A
Q3
08
A
Q1
09
A
Q3
09
A
Q1
10
A
Q3
10
A
Q1
11
A
Q3
11
A
Q1
12
A
Q3
12
A
Q1
13
A
Q3
13
A
Q1
14
A
Q3
14
A
Q1
15
A
Q3
15
A
Gas y/y% (left axis) LOW SSS
Consumer
February 13, 2015
page 23 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Best Buy: Similar to The Home Depot, results cannot lead us to a clear conclusion that
sharp changes in gas prices are alone leading to consistent relative underperformance or
outperformance.
Chart 33: Best Buy SSS In Volatile Gas Periods
Source: Jefferies, BEA, EIA and company information
Chart 34: Best Buy SSS vs. Gas Prices y/y%
Note: left axis is flipped for illustrative purposes; Correlation = 1.5% Source: EIA and company information
Period (Fiscal)
Avg GDP
Growth
Gas Price
Move
Gas Price
y/y% Avg BBY SSS Avg
∆ From Prior
12 mo Avg
Comp
Q302-Q402 -0.1% -28% -14.6% 3.1% 1.2%
Q105-Q306 3.2% 76% 21% 4.4% -2.6%
Q107-Q207 3.0% 29% 26% 3.8% -1.1%
Q108-Q208 1.7% 34% 4% 1.7% -2.3%
Q209 2.0% 22% 29% 5.3% 2.7%
Q309-Q409 -5.0% -52% -6% -5.6% -9.1%
Q110-Q310 -1.6% 36% -34% -1.1% -0.6%
Q411-Q212 1.3% 36% 25% -4.0% -4.7%
Q315-Q415 3.8% -30% -13%
-15%
-10%
-5%
0%
5%
10%
15%
20%-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Q1
97
A
Q3
97
A
Q1
98
A
Q3
98
A
Q1
99
A
Q3
99
A
Q1
00
A
Q3
00
A
Q1
01
A
Q3
01
A
Q1
02
A
Q3
02
A
Q1
03
A
Q3
03
A
Q1
04
A
Q3
04
A
Q1
05
A
Q3
05
A
Q1
06
A
Q3
06
A
Q1
07
A
Q3
07
A
Q1
08
A
Q3
08
A
Q1
09
A
Q3
09
A
Q1
10
A
Q3
10
A
Q1
11
A
Q3
11
A
Q1
12
A
Q3
12
A
Q1
13
A
Q3
13
A
Q1
14
A
Q3
14
A
Q1
15
A
Q3
15
A
Gas y/y% (left axis) BBY SSS
Consumer
February 13, 2015
page 24 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Survey results suggest falling gas prices are helping retail. While the survey
broadly suggests that most of the savings from lower gas prices is going into paying
down bills/debt or savings, many consumers indicated that they have used some of the
savings to spend more at retail. Groceries and restaurants were the two most common
targets of spending. When survey respondents were asked to think about the next 6
months, however, home goods/home improvement moved to the top of the list.
Chart 35: Survey Q5: Have lower gas prices led you to spend more in any of
these categories over the last 3 months?
Source: Google Consumer Surveys, Jefferies
Chart 36: Survey Q6: If gas prices stay low, do you expect to spend more in
any of the following categories over the next 6 months?
Source: Google Consumer Surveys, Jefferies
24.5%
22.4%
11.2%
11.0%
8.2%
6.4%
47.5%
Groceries
Restaurants
Apparel/accessories
Home goods and/or Home improvement
Consumer electronics/appliances
Sporting goods
None of the above
22.2%
21.1%
19.2%
16.3%
13.0%
8.5%
45.0%
Home goods and/or Home improvement
Groceries
Restaurants
Apparel/accessories
Consumer electronics/appliances
Sporting goods
None of the above
… but when looking into the future,
Home Goods and/or Home
Improvement ranked highest.
When consumers spent their gas
savings, it was most likely on food –
groceries in particular…
Consumer
February 13, 2015
page 25 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 37: Survey Q7: If you are spending your gas savings at retail stores,
where are you spending most of this money?
Source: Google Consumer Surveys, Jefferies
Chart 38: Survey Q4: How likely are you to spend some of your gas savings at
the store where you purchase your fuel (i.e., convenience store, grocery
store, wholesale club)?
Source: Google Consumer Surveys, Jefferies
27.4%
14.3%
11.8%
8.8%
7.2%
5.5%
47.9%
Discount stores such as Walmart and Target
Department stores
Home goods stores
Electronic and appliance stores
Dollar stores
Automotive supply/ service
None of the above
11.4%
13.2%
16.1%
19.6%
39.8%
Extremely likely
Quite likely
Moderately likely
Slightly likely
Not at all likely
41% of respondents are at least
moderately likely to spend gas
savings at the store where they
purchase fuel – WMT and COST
could be beneficiaries of this trend.
Discount stores are a relatively
popular destination for consumers
who spend their gas savings at retail.
Consumer
February 13, 2015
page 26 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Specialty Retail -
Set to Benefit from Pent Up Demand + More Pocket Money from Improving Economy Though current data suggests consumers are either saving “extra money”
generated from lower gas prices at the pump or using it to pay down debt,
our proprietary survey suggests consumers are likely to spend incrementally
more as the year progresses assuming gas prices remain low. Importantly, we
believe that economic improvement (including low gas prices) combined
with pent up consumer demand and a potential shift in the fashion cycle
could fuel consumer appetite for specialty retail in 2015, as we are already
seeing signs of an upward earnings revisions cycle. We see opportunity for
alpha beyond systemic recovery from those retailers with the strongest
brands, sharpest messaging and defensible competitive positioning (i.e.,
DECK, FOSL, GPS, and KORS). Given our survey findings, we believe Old Navy
is particularly well leveraged to an improving macro economy (GPS, Buy, $50
PT), given the brand targets a lower income demographic that is set to
benefit most from savings generated at the pump.
Below are key data points and survey findings to support our thesis above:
Falling unemployment should continue to be a tailwind for retail
sales, likely compounded by falling gas prices. Anecdotally, we would
expect lower gas prices to drive increased consumer spending/retail sales given
lower gas prices effectively increase consumers’ disposable income for
discretionary spend. Regression analysis of this fact has proven difficult,
however, given the historic relationship between falling gas prices and a
suffering economy (i.e., demand-driven gas cycles). During these times, retail
spend has trended down as well, resulting in a positive correlation between gas
prices and retail sales. Today, we are seeing a reversal in this relationship, which
has widely been attributed to a supply-driven oil cycle against an improving US
economic landscape (see supporting charts in the macro section). Given this
scenario, we have looked instead at the relationship between US unemployment
rates and clothing and accessories sales and found a statistically significant
negative relationship (see Chart 39, r = -0.72, p < 0.01). Based on our
regression analysis and Jefferies forecasts for the US unemployment rate to fall to
4.8% by year end, we predict growth in the clothing and accessories retail
category to accelerate to 4-5% in calendar 2015 vs. 2% growth in 2014.
Assuming the anomalous negative relationship between retail sales and gas
prices that has emerged recently continues to hold true, our outlook for strong
retail sales growth this year is further supported by government forecasts for gas
prices to continue to decline.
Consumer
February 13, 2015
page 27 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 39: Significant Negative Relationship between Specialty Retail Sales
and Unemployment
Source: Jefferies, US Department of Commerce, US Department of Labor
Strong Holiday/4Q top line growth and emerging upward earnings
revision cycle are positives here. We are already seeing strong evidence that
the consumer is healing with better than expected (and generally positive)
same-store sales growth across specialty retail during Holiday/4Q of calendar
2014. Additionally, according to US Census Bureau data, clothing and
accessories sales growth (y/y) accelerated meaningfully in November to 5.3%
and ended the year at a much faster rate of growth than it started. That said, we
do note a slight deceleration with January 2015 sales up 3.1% y/y, though still
growing at a faster rate than the overall category grew in 2014 (+2%). We
attribute the stronger growth we have seen since November to pent up demand
among consumers for specialty retail following nearly two years of weak retail
trends combined with an improved macro-economic backdrop featuring
consumer sentiment at an eight-year high, gas prices at five-year lows, and low
unemployment, among other supportive macro factors.
Consumer
February 13, 2015
page 28 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 40: Holiday 2014/4Q14 Same-Store Sales Growth
* Denotes Quarterly SSS
** Denotes December SSS Source: Jefferies, company data
Chart 41: Clothing & Accessories Stores Sales Growth Accelerated in CY’4Q14
Source: US Census Bureau: Department of Commerce, Jefferies
Survey says gas savings are already being spent at retail stores…
Approximately 10% of survey respondents reported spending some of their gas
savings at retail stores over the last three months. Though majority of
respondents indicated that gas savings are being used to pay down debt and/or
being put into savings, we are encouraged by the fact that consumers are aware
of the savings they are accumulating at the pump (i.e., roughly $15-45 weekly),
and that some are already using these savings at retail stores.
Consumer
February 13, 2015
page 29 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 42: What are you doing with the money you've saved at the gas pump?
Select all that apply.
Source: Google Consumer Surveys, Jefferies
…And more expect to spend gas savings in retail categories going
forward. More importantly, a greater percentage of participants (27%) plan on
spending more on consumer goods over the next six months if gas prices
remain low, 16% of which expect to spend more specifically on apparel and/or
accessories. Note, the percentage of respondents planning on spending more
on consumer goods increases to ~40% when we include the home goods
and/or home improvement category. We believe this statistic demonstrates the
increased likelihood that consumers will start spending their gas savings on
discretionary goods (rather than save or pay bills) as the year progresses and
they accumulate more savings, assuming gas prices remain low.
Chart 43: If gas prices stay low, do you expect to spend more in any of the
following categories over the next 6 months? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Apparel and accessories retailers are set to benefit from an increase
in consumer spending. Unsurprisingly, our survey results showed that
women are 2x more likely to spend more on apparel/accessories in the next six
months than are men. Therefore, when we asked those respondents planning
on spending more on apparel/accessories in the near future, in which specific
retail categories they expect to spend more, we were not surprised that 40%
chose women’s clothing. We also note that teen retail likely scored low due to
the fact that we only surveyed adults over 18 years of age. Overall, we found
10% of respondents reported
spending gas savings at retail stores
in the last three months.
A higher percentage of respondents
plan on spending more on
consumer goods (including
apparel/accessories) over the next 6
months than in the last 3 months.
Consumer
February 13, 2015
page 30 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
that survey participants who plan on spending more on apparel/accessories
next year expect to make purchases across various specialty retail categories.
Chart 44: In which of the following retail categories are you most likely to
spend more this year compared to last year?
Note: These results reflect the answers from 16% of respondents who reported that they
plan on spending more on apparel/accessories within the next 6 months. Source: Google Consumer Surveys, Jefferies
So what does it all mean?
We remain optimistic that same-store sales growth will improve in
FY’16. These survey results give us confidence that same-store sales growth will
improve in FY’16 for specialty retailers, especially as compares remain easy and
macro conditions remain conducive to consumer recovery. Specifically we
believe those retailers with the strongest brands and sharpest messaging (i.e.,
DECK, GPS, FOSL and KORS) will be most successful in attracting consumers
and ultimately should thrive most in FY’16.
Chart 45: Same-Store Sales Growth Should Improve Y/Y
Looking Ahead
Data based on average of specialty retail companies under coverage. Source: Jefferies estimates, company data
Chart 46: ...and Compares Remain Easy
Data based on average of specialty retail companies under coverage. Source: Jefferies estimates, company data
Consumer
February 13, 2015
page 31 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Additionally, specialty retailers head into FY’16 with clean
inventories, which should benefit sales and margins. We expect clean
inventories heading into 1Q as company managements take a more
conservative approach to inventory management to better align inventory
growth with recovering sales growth. As a result, we expect margins to improve
from here as sales improve and we move away from what we believe is the
trough of the AUR cycle. Solid Holiday sales reports ahead of 4Q earnings and
upward earnings revisions leave us cautiously optimistic heading into next year.
Chart 47: Spread between Inventory and Forward Sales
Growth Near 0 at F’3Q15 End
Data based on average of specialty retail companies under coverage. Source: Jefferies estimates, company data
Chart 48: We Expect Clean Inventories Heading into FY’16
Data based on average of specialty retail companies under coverage. Source: Jefferies estimates, company data
Overall, the results of our survey are encouraging directional indicators for
improving consumer demand and point to an environment conducive to
growth in the specialty retail space. That being said, we believe our top picks for
this year, DECK, FOSL, GPS, and KORS, present an opportunity for alpha beyond
systemic recovery. Going forward, we expect outperformance from retailers
with differentiated product, clear brand messaging and fully integrated omni-
channel infrastructure to deftly navigate the changing tide between brick-and-
mortar and digital. Specifically, we see opportunity for stock upside from
companies with defensible competitive positioning (FOSL), solid fundamentals
and upside bias to EPS through margin tailwinds and re-engaged consumer
demand (GPS), industry-leading brand equity and global growth prospects
(KORS) and category dominance (DECK) at attractive valuations (DECK, FOSL,
GPS, KORS).
We believe Gap is particularly well-leveraged to an improving macro backdrop.
Old Navy’s topline growth continues to outpace that of the Gap brand as a
secular winner among value-conscious, fast fashion consumers. Based on our
survey results, this demographic should spend disproportionately more with
savings from lower gas prices making up a larger percentage of their disposable
income. Historically, gas price declines have coincided with same-store sales
growth in the Old Navy division on a two-month lag (correlation coefficient =
Consumer
February 13, 2015
page 32 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
-0.43, see chart below) and we expect this relationship to hold true in 2015 with
gas prices expected to continue to decline (y/y) and our estimates for positive
SSS growth at Old Navy.
Chart 49: Old Navy Likely a Winner Here with Gas Prices Expected to Stay Low
in 2015
Source: Jefferies, company data, US Energy Information Administration
Bottom line: We believe the outlook appears bright for specialty retailers,
particularly against a backdrop of low gas prices and easy multi-year
compares. We reiterate DECK (Buy, $110), FOSL (Buy, $150), GPS (Buy, $50
PT) and KORS (Buy, $100) as our top picks for 2015.
Chart 50: Top Picks for 2015
Source: Jefferies estimates, company data
Company (Rating, PT) Investment Thesis Summary
DECK (BUY, $110)More diversified than ever, clean inventory, men's business percolating,
potential for margin re-expansion from cost leverage as investments scale.
FOSL (BUY, $150)Defensible position in watch industry, smartwatch threat likely overstated,
optimistic on sequential improvement in domestic retail.
GPS (BUY, $50)Old Navy remains secular winner; lower cotton costs should provide margin
tailwind in 2015; FCF to accelerate as capex / sales ratio comes down.
KORS (BUY, $100)Healthy brand, growing market share, LT growth opportunities in Europe, N.
America and Asia; low valuation creates attractive entry point.
Since FY’11, Old Navy SSS growth
has been negatively correlated
(correlation coefficient -0.43) with
the y/y change in the average retail
gas price on a 2-month lag.
Consumer
February 13, 2015
page 33 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Food/Drug Retail & Distribution –
The Convenience Store Channel: A likely winner from lower gas prices Distributor Core-Mark positioned to benefit from lift to inside store sales
With ~60% of survey respondents showing some indication of a willingness to spend a
portion of their gas savings at the store where they refueled their car (see Chart 51), we
believe this bodes well for inside store sales at gas/convenience stores.
We believe Core-Mark (CORE; Buy rated, $76 target), which distributes cigarettes, dairy,
snack/food and other convenience store general merchandise to well over 30K locations
across North America, should enjoy some sales tailwinds from the gas savings in
consumer’s pockets.
Chart 51: How likely are you to spend some of your gas savings at the store
where you purchase your fuel (i.e., convenience store, grocery store,
wholesale club)?
Source: Google Consumer Surveys, Jefferies
Looking one level deeper at those respondents who indicated that they intend on
spending more on food this year with their gas savings, ~70% of the responses within the
c-store category were found between moderately-to-extremely likely, beating out all other
channels (66% fast food, 52% sit-down dining, 49% grocery, etc.) and illustrating a
strong desire for customers to spend on in-store merchandise at c-stores.
Recent convenience store operator results illustrate strong merchandise sales
While our survey results predominantly show what potential benefits Core-Mark may
receive from increased c-store spend in the coming months, recent results from several
retailers provide some tangible evidence that lower fuel prices may already be positively
impacting merchandise sales:
Casey’s General (CASY; Not rated): In monthly comp results, we noted a clear uptick in
inside store sales trends for December on both a one-year and two-year basis. Of note,
Prepared Foods & Fountain accelerated to 16.3% from 9.7% seen in November (25.8% up
from 21.1% on a 2-year stack) while Grocery & Other increased to 8.5% from 4.7%
(14.5% up from 11.2% on a 2 year stack).
Nearly 60% of all respondents show
a desire to spend some of their fuel
savings on in-store merchandise at
the location of their gas purchase,
which bodes well for c-stores as the
channel account for over 80% of all
gas sales in the country.
Consumer
February 13, 2015
page 34 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 52: CASY monthly comps (1 year basis)
Source: Jefferies, company data
Chart 53: CASY monthly comps (2 year basis)
Source: Jefferies, company data
Murphy USA (MUSA; Not rated): The company has made several comments regarding
the impact of lower fuel prices on its operations. Of those relevant to Core-Mark, Murphy
USA noted that it observes “a very distinct shift in consumer behavior when prices get
above $4 a gallon… We do not see the same effect when prices get really low.” The
company is of the belief that the majority of a lower fuel benefit finds its way into savings,
debt paydown and/or large retailers like Walmart. Management did acknowledge an
increase in basket size likely benefiting from this phenomenon; however, it also stated
that it is difficult to isolate the impact from lower prices at the pump from various other
items including price increases and better weather comparisons.
CVS Health departure from tobacco could also be benefitting c-stores
In addition to lower gas prices, we believe c-stores could be benefitting from CVS Health’s
move to exit cigarette/tobacco sales in 3Q14. CVS Health (CVS, Buy rated, $115 target)
stated on its 4Q14 call that it believes the c-store channel is benefitting more than other
drugstores or other channels.
In an analysis by Altria, the leading tobacco manufacturer in the country, convenience
stores are shown to have the greatest proximity overlap with CVS stores. Based on the
market shares provided in Chart 54, convenience stores close to CVS stores have the
potential to increase their cigarette sales by 37 cartons per week.
We estimate that if Core-Mark receives its current fair share of the c-store channel cigarette
sales (~8.5% share), this would equate to an additional $170M or a 1.5% increase in total
revenue. This does not consider what gains the company could make through alternative
channels served, nor does it take into account that Core-Mark has consistently managed
to grow share in tobacco via the aforementioned contract wins while the overall industry
has declined.
(5.0%)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Dec-
11
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
Dec-
12
Feb
-13
Ap
r-1
3
Jun
-13
Au
g-1
3
Oct
-13
Dec-
13
Feb
-14
Ap
r-1
4
Jun
-14
Au
g-1
4
Oct
-14
Dec-
14
Sa
me
Sto
re S
ale
s (1
ye
ar
ba
sis)
Prepared Food & Fountain Grocery & Other Fuel Gallons
(10.0%)
(5.0%)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Dec-
11
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
Dec-
12
Feb
-13
Ap
r-1
3
Jun
-13
Au
g-1
3
Oct
-13
Dec-
13
Feb
-14
Ap
r-1
4
Jun
-14
Au
g-1
4
Oct
-14
Dec-
14
Sa
me
Sto
re S
ale
s (2
ye
ar
ba
sis)
Prepared Food & Fountain Grocery & Other Fuel Gallons
Chart 54: C-stores have the
highest potential for cigarette
gains post CVS’ exit from the
category (1 mile radius)
Source: Altria
Channel
Share of
Cigarette
Volume
Potential
Carton Gain
per Week
Convenience 68% 37
Tobacco Outlet 9% 5
Grocery 6% 3
Drug 6% 3
Liquor 3% 2
Mass Merchant 2% 1
Consumer
February 13, 2015
page 35 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
The Grocery Channel: Benefitting from lower gas prices, even for higher income consumers Could grocery be the biggest winner?
Our survey results indicate that of the categories provided, Grocery was the most picked
answer (other than “None of the Above”) on where lower fuel prices have led to
increased spending over the last 3 months and the second most selected choice behind
Home Goods/Home Improvement when consumers were asked where they expect to
spend more over the next 6 months.
Chart 55: Have lower gas prices led you to spend more in
any of the below mentioned categories over the last 3
months? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Chart 56: If gas prices stay low, do you expect to spend
more in any of the following categories over the next 6
months? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Perhaps it was no surprise, but when asked where consumers intend to spend more on
food this year vs. last year, grocery was the number one response at just over 38%.
However, after filtering the data a bit further, looking at those whom responded that they
are using their fuel savings to either pay down debt or increase savings in a prior
question, grocery stores was the clear choice as to where food spending increases could
take place (49% vs. the next closest option of full-service restaurants at 26%). We believe
this illustrates the potential for pent up spending on the part of the consumer as they seek
to first bolster their own financial position prior to spending more in the near future.
Chart 57: If you plan to spend more on food this year compared to last year,
where do you expect to spend more?
Source: Google Consumer Surveys, Jefferies
Grocery was the #1 response for the
location consumers are most likely to
spend additionally on food this year
vs. last year
Consumer
February 13, 2015
page 36 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Looking at top line results, Ingles Markets (IMKTA; Not rated), which operates just under
100 fuel stations adjacent to its grocery locations, recently called out a boost in consumer
spending due to lower fuel prices; ticket was up 3.1% while traffic declined slightly by
0.8%, providing a 2.3% overall comp and a nice sequential uptick from the 0.9% seen in
its 3Q14 period. The company had even noted on its 3Q14 call back in December that it
was already feeling some positive effects from lower fuel prices.
Natural/Organic/Specialty – surprising beneficiaries of lower gas
While we thought upper income consumers might not change behavior with more gas
money in their pockets, our survey results showed that when respondents were asked if
they expect to spend more in any given category over the next six months (please refer to
Charts 55/56), individuals with annual income of $75K+ were actually slightly more
prone to spend more of the gas savings on groceries relative to those whom earn less
than $75K annually (24% vs. 21%). These results were markedly similar in terms of
variance when income levels were cross-referenced with the grocery response in Question
5 (26% vs. 24%; when asked if lower gas prices have led to increased spend in certain
categories) and Question 9 (44% vs. 38%; consumers were asked if they are spending
more on food this year vs. last year).
Although Whole Foods (WFM; Hold rated, $56 target) and The Fresh Market (TFM; Hold
rated, $39 target) comps have historically showed loosely positive correlation (53% and
33%, respectively) to YoY changes in fuel prices, we believe this is more a function of the
fact that fuel price declines have historically accompanied economic downturns.
Interestingly, Sprouts Farmers Market (SFM; Not rated) actually has as fairly strong
negative correlation (-54%) vs. YoY changes in fuel prices, which could potentially be due
in part to the fact that the format caters more to the middle-income demographic vs. the
more affluent shoppers of Whole Foods or The Fresh Market.
Chart 58: While Natural/Organic/Specialty grocer comps
have historically shown modestly positive correlations to
fuel price swings…
Source: EIA, company data
Chart 59: … we believe this is more of a function of the fuel-
to-economic strength relationship; we still see modest
tailwinds for the Natural/Organic/Specialty grocers
Source: EIA, company data
(50.0%)
(40.0%)
(30.0%)
(20.0%)
(10.0%)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
(20.0%)
(15.0%)
(10.0%)
(5.0%)
0.0%
5.0%
10.0%
15.0%
20.0%
1Q
01
4Q
01
3Q
02
2Q
03
1Q
04
4Q
04
3Q
05
2Q
06
1Q
07
4Q
07
3Q
08
2Q
09
1Q
10
4Q
10
3Q
11
2Q
12
1Q
13
4Q
13
3Q
14
Yo
Y C
ha
ng
e in
Ga
s Pric
esC
om
pa
rab
le S
tore
Sa
les
WFM comps Fuel Price Change (YoY)
(50.0%)
(40.0%)
(30.0%)
(20.0%)
(10.0%)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
(10.0%)
(8.0%)
(6.0%)
(4.0%)
(2.0%)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
Yo
Y C
ha
ng
e in
Ga
s Pric
esC
om
pa
rab
le S
tore
Sa
les
TFM comps Fuel Price Change (YoY)
Consumer
February 13, 2015
page 37 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Restaurants -
Survey Indicates Gas Savings Are Leading to More Restaurant Spending… Given our survey results, it appears that restaurant spending has seen a modest boost in
the past three months, although clearly not the top place on the list for using savings at
the pump. Relatively easier weather compares make it tough to discern underlying trends,
but it appears that full-service restaurants (casual dining) could still see some increased
spending (see Chart 62 below). This echoes what we’ve heard from many casual dining
restaurant companies, but we wonder if the stocks are a bit ahead of themselves given the
moves the group has had in anticipation. We rate DRI, BJRI, CAKE, TXRH, BLMN, BWLD
Hold, but there is generally downside to our current target prices.
Chart 60: Have lower gas prices led you to spend more in any of these
categories over the last 3 months? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Chart 61: If gas prices stay low, do you expect to spend more in any of the
following categories over the next 6 months? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Approximately 22% of respondents
indicated spending more at
restaurants over the last 3 months
due to lower gas prices.
Roughly 19% of respondents plan
on spending more at restaurants
over the next 6 months.
Consumer
February 13, 2015
page 38 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 62: If you plan to spend more on food this year compared to last year,
where do you expect to spend more? Select all that apply.
Source: Google Consumer Surveys, Jefferies
…but Gas Price Correlations are Typically More Anecdotal than Evidential While the survey results are encouraging, we would note that the historical relationship
between gas price changes and restaurant sales metrics has been relatively weak. It is
generally assumed that with more money in consumers’ pockets, they will spend more
on eating out. However, it’s hard to parse out the relative increase in disposable income
from lower gas prices vs. improved sentiment as employment and real wages improve.
This is further complicated by the fact that restaurants may not be the first place gas
savings are applied, as demonstrated by the survey results above. Indeed, looking back at
data over the last 10 years, we find that the relationship between changes in gas prices
and restaurant industry SSS is statistically insignificant (we reviewed data vs. the Knapp
Track Casual Dining Index, the average of the QSR category, as well as McDonald’s).
Chart 63: Y/Y Changes in Quarterly Gas Prices vs. Knapp Track SSS
Source: Jefferies, Knapp Track, US Energy Information Administration
Consumer
February 13, 2015
page 39 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 64: Y/Y Changes in Quarterly Gas Prices vs. Average QSR SSS
Source: Jefferies, Company data, US Energy Information Administration
Chart 65: Y/Y Changes in Quarterly Gas Prices vs. McDonald’s SSS
Source: Jefferies, Company data, US Energy Information Administration
Consumer
February 13, 2015
page 40 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Appendix: Survey Details
Demographic Data
Chart 66: Demographic Data
Source: Google Consumer Surveys, Google Inferred Demographics Note 1: Google Inferred Demographics picked up gender on 860/1002 Note 2: Google Inferred Demographics picked up age on 805/1002 Note 3: Google Inferred Demographics picked up household income on 989/1002 Note 4: Google Inferred Demographics picked up urban density on 973/1002
Total Respondents 1,002
Gender1
Male 60.3%
Female 39.7%
Age2
18-24 10.6%
25-34 18.3%
35-44 14.9%
45-54 19.4%
55-64 22.4%
65+ 14.5%
Household Income3
$0 - $24,999 5.9%
$25,000 - $49,999 57.1%
$50,000 - $99,999 34.7%
$100,000 - $149,999 1.7%
$150,000+ 0.1%
Urban Density4
City/Metro 31.0%
Suburbs 50.4%
Rural 18.5%
Consumer
February 13, 2015
page 41 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Survey Questions & Answers
Chart 67: Question 1: How many miles do you drive per year?
Note: Only participants who selected 10,000 or more miles qualified to complete the remainder of the survey. Source: Google Consumer Surveys, Jefferies
Chart 68: Question 2: Given the lower gas prices nationwide, how much do
you estimate you're saving at the gas pump per week (in dollars) compared
to a year ago?
Source: Google Consumer Surveys, Jefferies
Consumer
February 13, 2015
page 42 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 69: Question 3: What are you doing with the money you've saved at the
gas pump? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Chart 70: Question 4: How likely are you to spend some of your gas savings at
the store where you purchase your fuel (i.e., convenience store, grocery
store, wholesale club)?
Source: Google Consumer Surveys, Jefferies
Consumer
February 13, 2015
page 43 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 71: Question 5: Have lower gas prices led you to spend more in any of
these categories over the last 3 months? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Chart 72: Question 6: If gas prices stay low, do you expect to spend more in
any of the following categories over the next 6 months? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Chart 73: Question 7: If you are spending your gas savings at retail stores,
where are you spending most of this money? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Consumer
February 13, 2015
page 44 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Chart 74: Question 8: In which of the following retail categories are you most
likely to spend more this year compared to last year? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Chart 75: Question 9: If you plan to spend more on food this year compared
to last year, where do you expect to spend more? Select all that apply.
Source: Google Consumer Surveys, Jefferies
Chart 76: Question 10: Which of these answers best describes your spending
expectations due to the trend of lower gas prices this year?
Source: Google Consumer Surveys, Jefferies
Consumer
February 13, 2015
page 45 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
About Google Consumer Surveys
Google Consumer Surveys is a fast, affordable, and accurate market research tool that
helps you make informed business decisions by asking internet users survey questions.
Users complete survey questions in order to access high-quality content around the web,
and content publishers get paid as their users answer. Google automatically aggregates
and analyzes responses through a simple online interface. Consumer Surveys
automatically fields a validated, representative sample of respondents in real-time,
whenever you want it. Google allocates users according to the demographic spread of
internet population data in each country. Demographic information is collected and
inferred based on a respondent’s browsing history. The algorithm is the same method
Google uses for advertising targeting, and uses significant indicators and patterns in order
to determine gender & age.
Consumer
February 13, 2015
page 46 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Analyst Certification:I, Randal J. Konik, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Daniel Binder, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Andy Barish, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Mark Wiltamuth, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Alexander Slagle, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Isabel Keller, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Rachel Barnes, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, John Gugliuzza, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Dolph Warburton, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Christopher Mandeville, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Clayton Meyers, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.
Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.
Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.
Consumer
February 13, 2015
page 47 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.
Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.
Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report• Best Buy Company, Inc. (BBY: $39.19, BUY)• BJ's Restaurants, Inc. (BJRI: $45.34, HOLD)• Bloomin' Brands (BLMN: $24.61, HOLD)• Buffalo Wild Wings, Inc. (BWLD: $186.97, HOLD)• Core-Mark Holding Co., Inc (CORE: $67.52, BUY)• Costco Wholesale Corp. (COST: $147.76, HOLD)• CVS Health (CVS: $103.00, BUY)• Darden Restaurants, Inc. (DRI: $61.41, HOLD)• Deckers Outdoor (DECK: $76.47, BUY)• Dollar General Corporation (DG: $67.59, BUY)• Dollar Tree Inc. (DLTR: $75.85, HOLD)• Family Dollar Stores, Inc. (FDO: $77.55, HOLD)• Fossil, Inc. (FOSL: $98.74, BUY)• Genesco (GCO: $72.56, HOLD)• Kohl's Corporation (KSS: $68.83, BUY)• Michael Kors Holdings Ltd. (KORS: $71.55, BUY)• Target Corp. (TGT: $76.87, HOLD)• Texas Roadhouse, Inc. (TXRH: $34.52, HOLD)• The Cheesecake Factory, Inc. (CAKE: $49.26, HOLD)• The Fresh Market Inc. (TFM: $37.07, HOLD)• The Gap, Inc. (GPS: $41.57, BUY)• The Home Depot, Inc. (HD: $112.16, BUY)• The Kroger Company (KR: $72.45, HOLD)• Wal-Mart Stores, Inc. (WMT: $85.89, HOLD)• Whole Foods Market (WFM: $56.30, HOLD)
Distribution of RatingsIB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY 1062 51.21% 289 27.21%HOLD 838 40.41% 158 18.85%UNDERPERFORM 174 8.39% 10 5.75%
Consumer
February 13, 2015
page 48 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
Other Important Disclosures
Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:
United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.
United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England andWales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)207029 8010.
Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; locatedat Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.
Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,Singapore 048624, telephone: +65 6551 3950.
Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a memberof the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 52516100; facsimile +813 5251 6101.
India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a MerchantBanker (INM000011443) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and National Stock Exchange of India Limited(INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400051, India; Tel +91 22 4356 6000.
This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information setforth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligationunder applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by theprovisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registeredbroker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European EconomicArea this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or havebeen assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. JefferiesInternational Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of whichare available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancywork. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage anypotential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only byprofessional or institutional investors. None of the investments or investment services mentioned or described herein is available to other personsor to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited isregulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limitedpursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert orinstitutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connectionwith this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +656551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report isissued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities andFutures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation tothis report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC.PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses,verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by Jefferies India PrivateLimited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning ofthe Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject ofthis document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or productdisclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authorityunder the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securitiesand Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under theAct in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should informthemselves about and observe any applicable legal requirements in relation to the receipt of this document.
This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion orestimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligationto maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors,and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned ordescribed herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or servicesto certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons orunder differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term viewsexpressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This materialdoes not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individualclients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange
Consumer
February 13, 2015
page 49 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.
rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently ofany issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. Noneof Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s).Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer priorto the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein arethose of the author(s) and may differ from the views of Jefferies.
This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproductionand distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party contentproviders do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible forany errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party contentproviders give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose oruse. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequentialdamages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content,including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. Theydo not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.
Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research issimultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ofJefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damagesor losses arising from any use of this report or its contents.
For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES
© 2015 Jefferies Group LLC
Consumer
February 13, 2015
page 50 of 50 , Equity Analyst, (212) 708-2719, [email protected] J. Konik
Please see important disclosure information on pages 47 - 50 of this report.