The strong October employment report only reinforced our view that consumers have more bucks to spend during the holiday season.

Solid employment gains and rising wages, combined with low gasoline prices, is a positive confluence of factors that should lead to a strong shopping season.
 
So far, consumers have been most noticeably spending on housing and cars, rather than at the department stores.

The latest evidence comes from Beazer Homes and D.R. Horton, which reported earnings earlier this week that topped estimates. Their shares popped, with Horton’s stock up 8.3% Tuesday, leaving it just shy of the 52-week high hit in August. Its new home orders rose 19% y/y, and sales increased 23%, according to its fiscal Q4 earnings press release. The company also increased its quarterly dividend 28% to eight cents a share.
 
In the quarterly conference call, D.R. Horton’s CEO implied there is more room for improvement: “We still think that there [are] legs left in this cycle. I mean, we’re not even close to what is historical demand.” US new home sales stood at 468,000 units (saar) in September, far below the last peak of 1.4 million units in July 2005. The S&P 500 Homebuilding industry’s forward earnings continues to recover from the Great Recession.
 
Those buying homes haven’t been shopping for clothes, not at Macy’s anyway. The retailer’s Q3 same-store sales declined 3.9% y/y, and profit fell to $118 million, or 36 cents a share, from $217 million, or 61 cents a share, a year ago, a 11/11 WSJ article reported.

The current quarter included impairment charges of $111 million related to plans to close 35-40 stores. Macy’s, which also reduced its Q4 forecast, was hurt by warm weather in the Northeast and a strong dollar that makes coming to the US and shopping more expensive for foreigners. Shares fell about 14% after the news, hitting a new 52-week low during the day.
 
A 11/10 WSJ article warned that earnings at department stores could be underwhelming as slower-than-expected sales had resulted in growing inventories.

Executives at Michael Kors Holdings and Ralph Lauren, which supply the chains with goods, have noted the buildup of inventory, the article states.

If retailers need to more aggressively discount merchandise to clear their shelves, their margins and profits could suffer, even as consumers benefit.
 
The S&P 500 Department Stores industry group looks relatively cheap, with a forward earnings multiple of 11.5, but that’s more than twice the anticipated earnings growth of 4.6% for the industry in 2016. Other areas in the Consumer Discretionary sector that are priced optimistically include Footwear, which is really code for “Nike.”

It has a forward P/E of 28.8, almost twice its expected 2016 earnings growth rate of 14.4%.

The forward P/E of the Apparel Retail industry is 19.1, while its earnings growth in 2016 is pegged at only 11.4%. Likewise, the Advertising group has a P/E of 16.5, far higher than its 9.1% estimated earnings growth next year.
 
Believe it or not, a more reasonably priced industry group is S&P 500 Internet Retail. It has a forward P/E of 60.0, a multiple that on its face seems insane until it’s compared to earnings growth expectations of 53.3% in 2016.

Home Improvement Retail, which includes Home Depot and Lowe’s, sports a 20.5 multiple, but is expected to grow earnings by 16.8% next year. And General Merchandise, which includes the dollar stores and Target, boasts expected earnings growth of 15.0%, only a touch below its 15.6 multiple.
 
There are some areas that seem like relative bargains in the mostly pricey Consumer Discretionary sector. Consider the Homebuilding industry, which has an expected earnings growth rate of 18.3% next year but only a 12.9 multiple.

Household Appliances has a multiple of 11.2 on expected earnings growth of 18.9%. Automobile Manufacturers has an earnings multiple of only 7.3, almost half the expected earnings growth of 14.6% next year, and earnings in Auto Parts and Equipment are expected to grow 16.0% in 2016, above the industry’s 12.6 multiple.