U.S. earnings results have provided some optimistic signs in terms of revenue growth, but a disappointing report from Coach Inc. on Tuesday highlighted a less welcome trend – an increasingly miserly U.S. consumer.
Coach management cited weak demand in North America for quarterly profits that missed analyst estimates by five and a half cents per share at $1.23 (U.S.). Sales were even worse, missing expectations by over six per cent.
Investors (likely long-short hedge funds) appear to have predicted the shortfall. The S&P Consumer Discretionary sector has the second highest level of short selling at 5.5 per cent of total market cap (chart). Only the telecom sector has attracted more short selling activity.
The Congressional "fiscal cliff" deal will take much of the blame for Coach's shortfall. Payroll taxes, used primarily to fund the Social Security program, rose from 4.2 per cent to 6.2 per cent as part the negotiated settlement between Democrats and Republicans. Management teams throughout the consumer discretionary sector will no doubt attempt to blame government malfeasance, rather than their own performance, for poor results.
Consumers are notoriously fickle, and Coach's problems may lie with its brand rather than macroeconomic factors. Earnings results from Southwest Airlines Co. and Apple Inc. on Wednesday may help clarify the trend.