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Minyan Mailbag: Costco and Gas Prices


A retailer can't control the weather or gas. The marketplace is what it is. Costco's job is to make money operating in it.


Minyan Mark writes:

As a retail guy, I thought you might be interested in some anecdotal evidence of how the consumer may be acting in one small market. I live in Bozeman, Montana, a metro area of about 60,000 folks, a college town with above average income for Montana.

Late on Sunday I went to Costco for a few items to set the stage for the Memorial day outing. As I was leaving I ran into the store manager and asked him how things were going. He said glumly,"terrible, this is the worst Memorial day weekend we have had at this store in eight years, we are down over $91,000 gross from Friday to Sunday." I asked him what he thought was the reason for the shortfall, folks out of town or what? He said,"without question it is the price of gasoline, it is cutting hard into peoples' budgets, it sure is to mine." Gas in Bozeman for unleaded is $3.27 a gallon. A year ago it was about $2.79. Big difference and it makes a dent in an area like Bozeman where we put in a lot of windshield time.

Thanks very much for the note, Mark. I've said it before and it bears repeating: you can learn an awful lot just hanging out in retailers like Costco (COST)... and if you can get a friendly manager (much too friendly from Costco Corporate's perspective, I'm sure) to talk to you it's like stumbling upon unpublished research reports and economic textbooks, all at once.

Gas makes up about 3% of consumers' budgets; believe it or not, that percentage is actually down from where it was 15 or 20 years ago. So, the economists (and/or bulls) will tell you that gas prices make for meaty headlines but don't actually "matter" much in an economic sense. On the other hand, retail managers, who get graded largely on the basis of their numbers over last year, will tell you that gas is a make-or-break issue for their customers and, by extension, the managers.

In terms of the stocks themselves, I remain in the camp which says, "sell any retailer blaming gas or the weather for shortfalls." My reasoning is simple, if harsh: A retailer can't control the weather or gas. The marketplace is what it is. CostCo's job is to make money operating in it. Retailers who are hitting estimates tend not to blame anything or see the problems (see: JC Penney (JCP) and Target (TGT), both of whom hit estimates recently and pronounced the consumer just fine, thank you).

I think gas prices are a headwind for the all the retailers this summer. I think it's a problem and it's one reason I'm not inclined to make huge bets on retailers during "the summer driving season (when gas prices tend to peak and retail sales tend to trough)". If I'm buying retailers for anything other than a trade these days I'm looking either at the aforementioned High Performers, who don't see the excuse, or companies like Wal-Mart (WMT) where the news is so monotonously bad, and the excuses are so frequent, that no one pays an attention to the whining.

None of which is intended to minimize the impact of gas prices on consumers like us. I drive into the city every day and the price to fill my tank is a growing thorn in my side and my mood. The only way to deal with it is to try to ratchet up our incomes from the stock market, which is the whole point of life in the Ville and why I appreciate you sharing your notes from the local Costco.

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