Positioned For Increased Consumer Spending by Royce Funds

Portfolio Managers Chip Skinner and Carl Brown on the potential benefits of current U.S. economic conditions and the investment opportunities they are creating.

Chip Skinner Royce Funds Consumer spending

Chip Skinner: As energy prices have come down, and as the job situation in the U.S. has improved, it seemed natural to us that consumer spending was going to pick up, and so we’ve been investing in the retail space and in the restaurant space.

One of the retailers that is a very high-quality company—very unique in its field—is The Container Store. Carl and I happened to visit the company in its headquartered city, Dallas, at one of their top stores. They help people get organized—helping them with closet items and that sort of thing.

They are growing their square footage on a per-unit basis, but most interesting to me is that they have at least three catalysts, three drivers, that are coming up. They have a loyalty program, which they are just rolling out to all of their stores, they have two types of higher-end closet solutions that involve an outside closet expert that comes into your home, that takes measurements, and then recommends The Container Store products, and they have their own product business called Elfa, which is a high-margin product, as you might suspect. One of the closet solutions actually draws in a lot more Elfa products.

Carl Brown: And how long have these initiatives been in place?

Chip: They started rolling out all three last year. The membership loyalty program will be complete very soon, and the other two will take some time to get to all their stores.

Carl: How long is their runway? How much room do they have to grow their store base?

Chip: There’s probably a market for 300 stores in the U.S., so there’s a lot of runway. And I think Dallas has four or five stores already. So there are several stores that can coexist in a given market.

Carl: One of our larger holdings in the restaurant space is Buffalo Wild Wings. We’ve owned it for several years and it’s been a fantastic investment for us. We still see a lot of upside both in terms of what their ultimate store count could go to and they’ve also got some specific initiatives within each restaurant that we think could add both to the top line and add greatly to the margins going forward.

Chip: It is a company that has been able to grow at a 20% rate and seems to continue to have the same outlook. The stock tends to be a little more volatile given the up and down moves in chicken wing prices. But this company’s been able to grow through that and has been a very good investment

I think the reason that we have expanded our consumer exposure is simply the fact that energy prices have dropped, gasoline prices have dropped—that puts more money in the individual consumer’s pocketbook.

Carl: The employment picture has gotten a lot better, slowly and steadily over the last several years.

Chip: It’s been a slow grind but it seems like companies are hiring again. The unemployment rate continues to drop. Those two main factors are the reasons that there should be more consumer spending.