Quick Look Around the Middle Class Retail Space

Before we get into this month's same store sales, every Thursday we have weekly job claims and since the government has a hard time messing with these numbers they might actually be somewhat accurate - we went over 400K last week and now have jumped to over 450K. Remember, all these bankruptcies in retail and restaurants we've been pointing out the past few months - those are all new (future) Walmart employees. Along with the auto makers, along with the airlines, along with the financial companies. Only in the monthly government reports do we see "job growth" in those areas - laughable.

But don't you worry, Wall Street constantly tries to find "hope" and tries to guess the "turn is here" and anticipates the pickup - they've been doing that for nearly a year now and will continue to try to find a sliver of hope in every data point - remember we rallied 300+ points just 2 days ago on a "better than expected" ISM number. That's the policy - ignore the bad reports and cling to the "better than expected" report (even when that report shows contraction) Hence your "it's time to buy airlines, retailers, financials, and consumer discretionary" rallies - the hottest parts of the market the past few weeks. I continue to charge that consumer discretionary spending is just in the early innings of a long tail spin [Apr 14: Stuff I've Been Negative on Since Last Fall] - I'll have a post up later about Whole Food Markets (WFMI) which has been one of my favorite shorts (I can't take advantage of it but I've pointed this out as a case example to short many times) and it's horrid numbers out later.

• The number of newly laid off people signing up for jobless benefits last week climbed to its highest point in more than six years as companies cut back given the faltering economy.
• The Labor Department reported Thursday that new applications filed for unemployment insurance rose by a seasonally adjusted 7,000 to 455,000 for the week ending Aug. 2. The increase left claims at their highest level since late March 2002.
• Among the companies announcing job cuts in late July or early August were: General Motors Corp., Weyerhaeuser Co., and Starbucks Corp. Bennigan's restaurants owned by privately held Metromedia Restaurant Group, are closing, driving more people to unemployment lines.

Today we have same store sales numbers - there are a few bright spots but I like to focus on "Middle Class" stocks to get an idea of what is going on there instead of reading Kool Aid government reports. Some favorite trend indicators are these 3 Kohl's (KSS), Target (TGT) and Abercrombie & Fitch (ANF). The first two are middle class America through and through (remember we outlined in December that this country is going to lose many of its Target shoppers as they are forced to move to Walmart) [Dec 26: Target Shoppers Turning into Walmart Shoppers] and the last name is an example of all things conspicuous consumption in the teenage (and early to mid 20s set). But mostly its teenagers taking parents money and wildly overspending for status symbols. But now their parents are increasingly unable to pay for such "luxuries" (note - I've owned ANF long many times over the years since frankly it's been a heck of a stock but now is not that time) But until I see "strength" in these type of names I'm not buying any "recovery" thesis that Kool Aid drinkers propose.

As I always say with same store sales

1. This is sales, not profit - if you are HIGHLY promotional (i.e. big discounts) your sales can go up, but that does not mean your profit will
2. Don't forget inflation. If you believe inflation is 3% than same store sales should go up 3% just for unit sales to be flat. If you believe it's 5%, than of course sales should be up 5%. If you believer higher inflation... then you get the picture. So any company showing less than 5% same store sales, in my book, is showing a contraction - due to inflation factors
3. July was the near the top of the bell curve for rebate checks - so imagine these numbers WITHOUT rebate checks and that will be the future. Until the next "stimulus plan"
   

Let's see how these 3 did:

Target Same Store Sales Down, Sees August Decline

• Discount retailer Target Corp (TGT) said on Thursday sales at stores open at least a year fell a more-than-expected 1.2 percent in July and it forecast another decline for August.
• Target said that in the month, sales were strong in electronics like video games and TVs, health-care items and food. (staycations and consumer NON discretionary)

Kohl's July Sales Down 10.4 Percent

• Kohl's Corp (KSS) said on Thursday that July sales at stores open at least a year fell a worse-than-expected 10.4 percent, hurt by lower inventories, and the mid-priced department store chain's shares fell 2.5 percent in premarket trade.
• Analysts on average were expecting Kohl's sales to fall 7 percent for the month, according to Thomson Reuters Estimates. (missed it by THAT much)
  

Abercrombie & Fitch (ANF) July Same Store Sales Down 7% Percent

• Teen apparel retailer Abercrombie & Fitch Co. (ANF) said Thursday same-store sales dropped 7 percent in July and missed Wall Street expectations.
• Analysts polled by Thomson Financial, on average, expected same-store sales to decline 1.4 percent. (missed it by THAT much)

I picked these 3 - there are a handful of others that represent the great wiping out of the middle class that you could pick and the results would be just about the same. Again, the spin on financial media will be "yes but that is backwards looking when gas was $4! Just wait now that gas is headed to $3!; that's going to help the consumer so much!" As if $1 of gas (or about $15-20 per fill up) is going to make up for job losses, housing values tanking, lack of confidence, and inflation of 12-15%+ (my figure not the governments) in most other areas (versus wages only going up 3-3.5%). Oh yes, "they" will also leave out the fact that these numbers are inflated by the stimulus check - that's BACKWARDs looking as well.

So again folks, don't buy the company line. These stocks will rally every so often, sharply and the breathless commentary will be *THIS* is the turn, the stock market is once again predicting the economy is back on track in 6 months. The same market predicting that in October 2007 (when it hit all time highs) and the same market predicting that in May 2008 (after a 7 week rally post Bear Stearns) There is no turn coming anytime soon. It's all about home prices and inflation. Again, we have MORE inflation coming this winter (in things we MUST have i.e. home heating) even if natural gas goes to $6 and crude to $80.

Areas of strength from what I see? Costco (COST), Walmart (WMT) [although "disappointing" versus expectation], BJ's Wholesale Club (BJ) <-- even better than Costco this month, Big Lots (BIG), and that's about it outside of the specialty retailer names in the previous post this morning. A few retail names with poor numbers are bouncing this morning because their "bad numbers" are "better than expected" but when you take into account inflation, and stimulus check - the numbers are just bad for those who people are trying to find a silver lining that is not there. Don't believe me? Here is what Mastercard (MA) had to say

• U.S. sales of clothes and shoes fell in July as cash-strapped consumers cut back spending further to pay for nondiscretionary purchases such as food and gasoline, MasterCard Advisors said in a report on Wednesday.
• Overall July apparel sales declined 0.8 percent from a year ago, with women's apparel sliding 3.3 percent, the eighth-straight month that sector fell
• "This is one of the weaker months I've seen in the last five years," said Michael McNamara, vice president of SpendingPulse, who said consumers are cutting back more on discretionary items since the U.S. government's tax rebate checks mostly cycled through the economy before July began.
• "We're continuing to see a divergence here in where the retail dollars are flowing," McNamara said. "They really seem to be flowing into the nondiscretionary areas like drugstores, food and gasoline, and it's really coming at the expense of some of these retailers such as apparel and electronics and appliances."

We called this scenario a year ago when everyone was telling us there would not even be a recession in America. Sadly, quite a few still cling to the "there is no recession" because the government reports say so. These people obviously do not mingle with normal middle class people and ask them the reality on the ground. As for the lower class? Just spend some time reading through what Walmart has been saying the past 4-5 months - literally they are seeing spikes of activity on Fridays (paydays) as people spend immediately and then have to pray they get through the next week - big dropoffs in shopping the days before payday as people cannot stretch their dollar for the entire week anymore. But not to worry - inflation is benign, contained, and nothing to worry about. So says the government reports. And we're also not in a recession. Yep. [Do the Bottom 80% of Americans Stand a Chance]

I'm still trying to find some thesis on what turns this ship (US economy) around - so I can get on the "US recovery is imminent" team (poms poms in hand)... hard to find something prominent enough to hang one's hat on short of a huge bout of deflation to make things affordable again. And that would make the upper 0.5% very mad (they don't like when their assets deflate). So Uncle Ben will continue to print money at a mad pace to make sure he defends the upper 0.5%. And away we go... recovery in 6 months. "They" just won't tell which 6 months...

Long Mastercard in fund; no personal position