Here's a clue: Consumers are picky, not dead

Housing dip is hurting Home Depot; cheaper gas hasn't spurred sales at Wal-Mart. But Target is feeling some holiday cheer.

By Parija B. Kavilanz, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- 'Tis the season to be jolly? Maybe not for Home Depot and Wal-Mart, two of the three retail bigwigs that reported their results on Tuesday.

But things are looking up for Target.

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As retailers near the final countdown to "Black Friday," all eyes are squarely focused on the consumer.

Black Friday, or the day after Thanksgiving, is the traditional annual marker for the "unofficial" start to holiday shopping.

For retailers, November and December are critical because together the period accounts for as much as 50 percent of their profits and sales.

Moreover, since consumer purchases fuel two-thirds of the economy, these two months provide a vital temperature-taking of the overall health of the nation's economy.

Any significant slowdown in consumer spending immediately raises concerns that the economy as a whole will likely follow.

So how do things look so far? Despite the retail picture being a little muddy this year, analysts for the most part seem to agree that consumers are not yet shying away from shopping.

They're just becoming more cautious and more picky about where they shop.

Home no longer a sweet spot. So what?

Home Depot (Charts), the nation's largest home improvement retailer, is especially hard-hit by the dip in home values.

As home prices cool and interest rates creep up, Americans have backed away from refinancing their homes. The nation's housing market has thus far made consumers feel wealthier, acting as a buffer against the run-up in gas and energy prices while padding their wallets with a little extra cash to spend on clothes, shoes, eating out and other discretionary purchases.

With interest rates rising, people don't have the same options to pull cash out of their homes. Industry watchers say this is affecting the psychology of the consumer.

Home Depot is feeling the pinch more than other merchants. Declining home sales and prices and fewer refinancings have hurt its retail division. The company missed its third-quarter profit target and sharply cut full-year profit estimate.

At the same time, sales outside of the home improvement space, including in specialty stores and department stores like American Eagle Outfitters and J.C. Penney (Charts) have surged in recent months.

Boston Consulting Group (BCG) on Monday released some surprising results of a consumer survey that polled more than 2,500 consumers in October about their spending intentions over the next few weeks.

Among the findings, 67 percent of those polled said fluctuations in housing prices are having no effect on their spending this year. When consumers do spend more, or "trade up" in gifts for themselves or others over the holiday, it will be for their home, computers, a new car, or eating out at a restaurant.

"Clearly Americans remain optimistic and are cautious spenders," Michael Silverstein, senior vice president at BCG, wrote in the report."Interestingly, the view about home prices is, 'I'm not moving, and I don't rely on paper profits from my house, and I have every expectation that values will return or stay strong."

Have money, will spend

Michael Niemira, retail economist with the International Council of Shopping Centers (ICSC), suspects that income growth more than the recent gas price retreat is helping to offset the negative housing effect on spending.

To his point, even though October retail sales showed some softness unrelated to gasoline sales, overall year-to-date retail sales in the general merchandise, clothing, furniture, electronics and office supplies categories are up 6.5 percent.

"Consumers have benefited from steady income growth. Year-over-year income growth is up 8 percent," he said. "This is helping to drive retail demand."

Wal-Mart (Charts), the world's largest retailer, hasn't yet seen a solid upswing in sales at its stores. The company posted a third quarter profit that beat estimates but missed on sales.

Wal-Mart executives admitted they were surprised that sales didn't get a boost from lower gas prices.

Wal-Mart's rival Target (Charts), which also reported its quarterly results Tuesday, fared better, beating Wall Street's forecasts on both profits and sales.

While Wal-Mart expects fourth-quarter sales will rise an anemic 1 to 2 percent, despite its widespread price slashing on toys and electronics, Target anticipates a mid single-digit increase in its quarterly sales.

Niemira also alluded to the "upscaling effect" to explain Wal-Mart's pain and Target's gain.

"When gas prices pulled back, everyone except Wal-Mart got a sales lift," Niemira said. "What seems to have happened is that as people started to feel good, they didn't want to shop at a discount or dollar-type store. They wanted to shop for better quality and variety."

As a result, department stores and specialty stores have been outpacing sales gains at their value-priced competitors.

Holiday hostility = big bargains for shoppers

Don't discount Wal-Mart's comeback attempt, yet.

"Although sales in the U.S. were softer than we hoped for in the third quarter, there are real opportunities in the fourth quarter to build on the momentum of the aggressive pricing strategy we have implemented in our stores for the holiday season," Wal-Mart CEO Lee Scott said in the company's pre-recorded earnings call.

"This season, no one will doubt Wal-Mart's leadership on price and value," he said.

Intent on winning the holiday price war, the retailer trumped the rest of the industry by being the first one to slash prices early in the year-end gift-buying season on key categories such as toys, electronics and home appliances.

It's rivals have yet to catch up.

Target executives said in the company's earnings call Tuesday that the retailer will act fast to match Wal-Mart's prices on big items wherever it can.

With less than two weeks to go to Black Friday, industry watchers are betting that consumers will bag some big bargains in the coming days.

Will that spur spending? Nigel Gault, chief economist with Global Insight expects a short-term pop. Longer-term he's not sure. "I think spending will still look a little sluggish over the holidays," he said.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.