Retail Staggers into the New Year

Company Research, Newsletter


Holiday sales results, long expected to be anemic, under-performed depressed expectations.  December sales results are generally the most closely watched and most important results of the year, and almost every firm failed to deliver what the market needed to hear.  Observers knew that consumers were going to be very cost-conscious amidst one of the longest and most severe recessions since WWII.   Unemployment is on the rise and even those with jobs are being cautious.  To make matters worse, many retailers are lowering earnings guidance and there is no end in sight to this dreary spending environment.

Even retailers thought to be recession resistant are suffering. Yesterday, Walmart (WMT) shares got whacked trading down more than seven percent on disappointing same-store sales and lowered guidance.  Up until last month, the world’s largest retailer had benefited from the recession as consumers were flocking to its one-stop stores in order to take advantage of “everyday low prices.”  WMT stock had been up more than 15% since the beginning of 2008, posting strong sales results in the face of a slowing economy.  However, even mighty Walmart is not immune from the impact of a rapidly retrenching consumer.  There are simply less dollars to go around than there were at this time last year.

Similarly, BJ’s Wholesale (BJ) which, like Walmart, had enjoyed strength as the economy slowed also turned in a bad December.  (We profiled BJ’s success in consistently producing double-digit sales growth in Another Blowout Month for BJ’s Wholesale.)  However, BJ’s same-store sales have sagged over the past two months only growing 1.6% in December and 4.1% in November.  When even the discount retailers begin to falter, it is time to be very cautious about retail stocks as a whole.  It seems that you have to drastically lower prices in order to attract sales, if you need confirmation check out Family Dollar Stores (FDO) first quarter results.  Even Walmart cannot compete with those prices!

So, times are tough at discounters as they have missed expectations and lowered future guidance but at least sales are better than the same month of last year.  Specialty electronics and other big ticket retailers are having an even harder time.  Best Buy (BBY) saw December sales shrink by 6.5% versus last year.  Best Buy may have edged Circuit City out of the market, but the overall consumer spending pie has shrunk dramatically, under-cutting the benefits of Best Buy’s earning a bigger slice.  Furthermore, margins through out the industry are likely to be squeezed further as retailers slash prices in order to both lure bargain-conscience shoppers and shed unsold inventory.  On the whole, there are less dollars flowing into the retail coffers and each sale is less profitable than retailers would like.

Still, there are a few bright spots in retail and every couple of days a better-than-expected announcement will hit the wires and an-already-depressed stock will get a short-term bounce.  However, these gains rarely last long because the vaunted American consumer is not spending like he or she has in the past.  Many Americans have lost a large portion of their wealth as homes and investment portfolios plunge in value and flush home equity credit lines are but a faint memory.  Furthermore, forecasts are for unemployment to continue to worsen in the coming months and many more consumers now fear that their job may be in danger.  Also, baby boomers have lost a fair amount of their retirement nest egg and will forego large purchases in an effort to restore savings.  All of this spells continued trouble for discretionary spending.  If you are determined to invest in the retail sector, we like companies such as Walmart and BJ’s far more than any sort of high-end name.  At least the discounters are continuing to sell, even if results are not as good as projected.

More on this topic (What's this?)
A Depression Compendium
No Cause for Optimism
Read more on Wal-Mart, U.S. Economic Cycles, Retail at Wikinvest

Ockham Research Staff @ January 9, 2009

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