Will the Grinch Steal This Christmas?
10/08/2009 2:01 pm EST
Only 78 days until Christmas, and retailers are in suspense over whether this holiday shopping season will be as bad as the last two.
The answer could help determine how long the seven-month-old stock market rally lasts and what kind of economic recovery we have.
There was ample fodder for bulls and bears in Thursday morning’s monthly release
of same-store sales growth by some of the nation’s largest retail chains.
The glass-is-half-full crowd could take solace from the fact that a comfortable majority of the retailers’ sales beat Wall Street expectations, and several raised their outlooks for the quarter.
But there was plenty of red meat for the doubters, too: September sales for many of these chains were down even from last year’s abysmal numbers.
I expect this year’s holiday season—in which retailers can make up to half of their annual profits—to show at worst a slower decline or at best a mild gain over the last couple of years. Profitability should also improve as rock-bottom discounting fades.
But I’m skeptical it will mean a real turnaround for American consumers. They face too many obstacles to resume their free-spending ways—if they even wanted to.
That makes retailing stocks, which have soared from their lows, particularly vulnerable in the weeks and months ahead.
“The American consumer is scared stiff,” says longtime retail bear Howard Davidowitz, chairman of New York-based Davidowitz & Associates, a retail consultancy. “The consumer is continuing not to spend, and nothing is going to change that.”
Why not? New jobless claims are lower than they were earlier this year, but the number continues to rise. That has pushed the official unemployment rate ever-closer to 10% and the total “underemployment” rate—those who are unemployed plus those who would work more hours if they could—near 17%. The Wall Street Journal this week reported that “private-sector payrolls today are lower than they were at the end of 1999.” Incredible!
Meanwhile, consumer credit continues to contract. On Wednesday, the Federal Reserve reported that total consumer credit outstanding fell by 12% in August. That was much higher than analysts expected and marked the seventh straight month of declines in borrowing.
Some of that is part of the vaunted “re-liquefication” of US consumers’ balance sheets. But much of it comes from lenders pulling in their horns.
Yes, the US government is subsidizing low rates for first-time homebuyers. But originations of jumbo mortgage loans—those above the $417,000 cutoff for conforming Fannie Mae and Freddie Mac mortgages in much of the country—fell a whopping 72% from 2007 to 2008. And to this day, it remains very tough to get a jumbo.
Also, lenders and credit card companies have cut credit lines dramatically, even for the most credit-worthy customers. “One in five US consumers experienced cuts to revolving credit lines such as home equity loans and credit cards in the six months to April,” according to the Financial Times.
Not exactly conducive to spreading the holiday cheer! No wonder Davidowitz looks for a 2% decline in retail sales this year (vs. 3.4% down in 2008), and the National Retail Federation predicts a 1% drop.
Yet Michael Niemira, chief economist for the International Council of Shopping Centers (ICSC), actually thinks we’re on the cusp of a turnaround. He’s projecting a 1% increase in sales in what he calls “the first recovery season in three years.” He believes the recession ended in July.
“We’re poised for a better season than we’ve seen,” he maintains. “The numbers we’re projecting are still relatively weak, but the underlying dynamics [are improving].”
Such as? The consumer, whom he thinks will start spending again as the economy improves.
“The historical record is that the consumer doesn’t wait for the unemployment rate [to start falling] before [he or she] begins to spend,” Niemira says.
“We’ve gone through a period of weak demand for a long time—and that pent-up demand will be building.”
Niemira cites the latest ABC News Consumer Comfort poll, which showed that American consumers were at their most optimistic in a year, although overall attitudes remain abysmal. (The Consumer Comfort Index has been quietly edging up since mid-June.)
Yet Niemira says there has been “dramatic improvement” in the outlook of households earning more than $100,000 a year: Their index is at -3, way better than -42 a month ago (and compared with a -45 in the general population). Confidence numbers have also moved up nicely for households earning $75,000 to $100,000.
Bottom line: The upper middle class may be ready to spend again.
Meanwhile, the stores have gotten their acts together in the last year. Even the bearish Davidowitz says retailers have shuttered bad stores, managed their cash well, refinanced their debt, and learned to offer consumers more value for their money.
They’ve also gotten a much better handle on inventory, a 180-degree shift from last year, when chains like Saks (NYSE: SKS) almost literally gave away the store, offering 70% discounts on top-tier designer merchandise. (I know: I bought two sport jackets there at sinfully low prices.)
Better inventory control, of course, should boost stores’ profitability even with weak or no sales growth, allowing for hefty, but not crazy, discounting. “Profitability is really the story of the season,” says Niemira.
Investors may have anticipated that. The Standard & Poor’s retail index has rallied 81% from its November 2008 lows and 69% from the market bottom of March 9th, trouncing the S&P 500. (The retail index was up big in Thursday morning trading.)
Individual retailers have done much, much better. Saks and Macy’s (NYSE: M) have roughly quadrupled, teen retailer Aeropostale (NYSE: ARO) has advanced almost as much, Gap (NYSE: GPS) has just about doubled, and luxury emporium Tiffany (NYSE: TIF) has soared nearly 150%.
Those are big moves, which I think more than discount the margin growth and small sales improvements these stores are likely to see this holiday season.
Whatever Santa brings to retailers this year, investors who were smart or lucky enough to be in retail stocks should take some chips off the table—just as I recommended that people take some profits in financial stocks and real estate investment trusts, which also have had huge runs.
Unless you believe the consumer is ready for a miraculous recovery, then the easy money in retail stocks has been made—and then some.
Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own.