Thursday, February 7, 2008

Some Comments on Retail Numbers

I'd like to make some comments on the general retail numbers today to cut through the spin, and follow up on points I've been making for months
  1. American parents will do whatever their kids want. They spoil them, especially at the middle and upper middle class. Hence you will continue to see relative strength for $140 jeans selling at Abercrombie (ANF), while the parents cut back for themselves. I've been saying the same for video games, and Apple products. It's just a sad reality. This is the culture; it will take something truly earth shattering for that to stop.
  2. Keep in mind, any "beats" you see today are off sharply lowered estimates, lowered in the past month in many cases. So all these companies that are beating (in most cases) is beating numbers they issued in the past 4-6 weeks. Big deal. What is more alarming are the number of misses versus what companies were guiding even 4-6 weeks ago. That shows you how bad the degradation is.
  3. Walmart (WMT) accounts for $1 out of every $10 spent in the USA in retail. Sales were still up 0.5% but below expectation. The weakening there is troubling to me, because my expectation is people would be moving downstream and spending at lower end retailers i.e. a substitution effect. But it appears things are even worse than I assumed - or at least the degradation is happening quicker than I thought. I found one thing extremely troubling, the gift card issue. It does dovetail with my thoughts I have been espousing especially in my Mastercard (MA) rants... that people will INCREASINGLY be using credit cards for day to day expenses - food, gasoline, heating, et al. We are now seeing that happening with the gift cards - instead of spending the gift cards as they normally do in January, people are hording them and will be using them over time to pay for groceries and gasoline. This is the "pooring" of America I talk about, and how inflation is ripping at people. It's already doing it to the lower socie-economic and I contend it is moving up the food chain into the middle class.

“Gift card redemptions were below expectations, and customers appear to be holding gift cards longer and using them more often for food and consumables rather than discretionary purchases.”

So whatever the spin is, these are the things I am looking at. I don't find much good out there from what I am seeing. The warehouses are doing well, but again thats the move downward down the food chain as people buy in bulk to save in costs.

I don't buy the raging bulls arguement that you buy retail now because it's an early cycle play. That assumes we are in a 01-02 or 91 type of recessionary environment (which were not led by consumer contractions), and this slowdown will be short and shallow. Will retailers have easy year over year comparisons 12 months from now? Yes. But I am not buying retailers in February 2008 for easy year over year comps in February 2009. Way too early.

Again, that rally in the past 2 weeks in homebuilders, financials, and retailers was a lot more strong than I anticipated. I felt dumb for not participating, but I was using small things like... facts. The people running up these stocks were using small things like... playbook. Playbook trumps facts in the short run, and we suffer for a few weeks. But now reality sets in. Again, I cannot stress the misses you are seeing today in 70%+ of the retail numbers are off ALREADY SHARPLY reduced estimates, that were just SLASHED in the past 4-6 weeks. That is how quickly things are degrading no matter what the SPIN is today by the media. Walmart (WMT) and Target (TGT) are the economic tells; not Abercrombie or Gamestop (GME).

Last point - as I wrote yesterday in the Macy's post... we have too many stores. More layoffs coming across this sector coming in the the next 1-3 quarters. They have to "right size" - which is a pretty term for "fire people".

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