Wednesday, December 26, 2007

Target (TGT) Shoppers Turning into Walmart (WMT) Shoppers

In my piece 'Do the Bottom 80% of Americans Stand a Chance', I (virtually?) penned a lot of the long term issue hitting the "middle class". I also talk a lot about tell stocks - Fedex (FDX) or UPS (UPS) for the general economy, Coach (COH) for the aspirational upper middle income/lower upper income [Coach (COH) Imploding]... we also are getting a lot of hints from companies like Starbucks (SBUX), Harley Davidson (HOG), etc on the stressed US consumer.

To that "tell" list we should watch Target (TGT). Target is one of the best run retailers in America - but the past few months the news flow has just gotten increasingly worse. So unlike say a Sears Holding (SHLD) which is full of badly run Kmart stores, when one of the best of breed retailers is struggling, you take notice. With a not so great retailer you might think, well maybe they have issues with execution but Target is not that kind of company. I think what is slowly happening is more and more Target shoppers are becoming Walmart shoppers... not by choice. I won't rehash the litany of reasons, and today's bad news out of Target is not a reason to claim victory on a thesis. One data point is never useful but the past 3-4 months have seen a series of lowered expectations and Target not even able to hit those lowered guidances. While the economic bulls claim the consumer has always pulled us through and 2008 will be no different; I say 2008 will be different. And our "tells" are showing us, one by one, even as government reports tell us "nothing to worry about, go about your business, the economy is roaring". So with the big push to gift cards we really won't know how Christmas will be until the end of January when most of these cards are redeemed. But the focus on Christmas is over blown to me; people will spend on Christmas to one degree or another no matter what. It's what they are doing the other 48 weeks of the year that will be causing the issue. Each incremental dollar that has to go to $5 milk or 30% higher (from a year ago) chicken, is less dollars for the mall, or the nail salon, or the local theater. And in a service economy where we create less 'goods' by the year, it's a very damaging ripple effect. These problems have been showing up for years in the "have nots" (people you rarely hear about in the news), but the problems will slowly but surely move upstream... to the type of people that the news actually cares to report about. People with average service economy jobs, living average lives, forced to live at lifestyles below where they were 5 years ago, all the while hearing how the economy is booming in aggregrate... I guess at that point it will become "newsworthy".

I expect many of you sat around at Christmas and the local economy came up in some part of the conversation. I also expect very few of you said, wow things are roaring, that GDP in last quarter was up 5%, I am feeling great! ;) That wasn't what I was hearing but perhaps your Christmas party was different.

Target Offers Holiday Gloom
  • For Target (TGT), the holidays were far from bright. The discount retailer warned late Monday that it now expects December same-store sales to be in a range of down 1% to up 1%. That's far short of its prior projection for a 3% to 5% rise in same-store sales, or sales at stores open at least a year.
  • Based on those numbers, it's unlikely Target can meet its projections for fourth-quarter earnings. In early December, the company said sales trends would need to "meaningfully improve" in the month for it to achieve its fourth-quarter EPS growth forecasts.
  • Target, a longtime outperformer, has particularly stumbled recently as some of its lower-income customers cut back on spending amid the housing and credit crises.
Oh yes on a non related note that doesn't matter to the stock market (approaching record highs), housing prices fell 6.7% in October - but don't worry - this will soon pass and the economy is booming and luckily subprime is contained (Paulson August 2007). I believe the first part of grieving is denial. We still seem to be in it.... but in a first... our friend Lawrence Yun, he of National Association of Realtors fame [Housing Will be Flat Next Year! Whew!] actually admits things might not be rosy! wow, miracles do happen this time of year.
  • "This is just the beginning," said Peter Schiff, a Darien, Conn.-based investment adviser known for his bearish views of the housing market. "Pressure is there for much, much lower prices."
  • According to Schiff, one factor that will drive prices lower is a change in buyer psychology. "The prices that existed were completely artificial, a function of speculators who are no longer in the market," he said. "Some buyers thought they were going to get rich." Today, however, that demand has all but disappeared. "More people want - or have - to sell," said Schiff, "because prices aren't going up, so buyers have to look at the actual cost of owning a home."
  • Lawrence Yun, chief economist for the National Association of Realtors and among the most optimistic of industry insiders, conceded that large inventories will mean further price declines. "Price growth during the boom was clearly unsustainable. This is the payback," he said.
  • But, according to Yun, the Case-Shiller index exaggerates declines because it covers many of the markets that have been hardest hit. He cites Realtors price data that show a majority of 150-plus markets recorded year-over-year price gains. (oh of course!! but this 'exaggeration' by focusing on these markets was never complained about when the market was going up and those markets went up the most?! Oh Mr Yun, have you no shame)
I am so short Mr Yun it is not even funny

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