Bed Bath & Behind the Curve

06/21/2012 11:49 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The house furnishings chain is only the latest retailer to serve up a disappointing outlook as consumer malaise spreads, writes senior editor Igor Greenwald.

The list of retailers disappointed by their customers’ rediscovered thrift grows ever longer. It’s not exactly curtains for consumers yet, but neither are they buying curtains with the expected zeal, as last night’s disappointing forecast from Bed Bath & Beyond (BBBY) confirms.

The home-furnishings chain’s stock is on sale today after the earnings and same-store sales forecasts fell short of hopes, and the CEO acknowledged on the conference call “the ongoing economic challenges affecting consumers.” These include the painful recent slowdown in hiring and an uptick in firing, alongside minimal income growth and the stock market’s uninspiring gyrations.

Add in the European recession, austerity at the state and local level in the US, and the looming federal budget cuts and tax increases, and all of a sudden $3.50-a-gallon gasoline doesn’t seem like such a huge windfall. Three-fifty a gallon didn’t forestall the Great Recession in 2008 and it won’t make everything OK this time either.

“Household spending appears to be rising at a somewhat slower pace than earlier in the year,” noted the Federal Open Market Committee yesterday. The Conference Board’s index of consumer confidence and the Thompson Reuters/University of Michigan index of consumer sentiment have faded notably from their springtime highs of late.

Meanwhile, the savings rate is already as low as it’s been since late 2007, as consumers dig deeper to make up for the pay raises they haven’t been getting.

This is a dangerous climate for retailers who had been hoping the winter shopping spree marked a decisive turning point for the better. The day before Bed Bath & Beyond sprang a leak, it was La-Z-Boy’s (LZB) turn to fold after undershooting expectations. On Monday, discount footwear merchant DSW (DSW) and women’s fashion chain Body Central (BODY) got crushed after reducing guidance.

Not every report has set off alarms: Pier 1 (PIR) delivered encouraging results and forecasts just last week. But that stock remains 15% below its early April peak, while Tiffany (TIF) is 28% below its March high and Coach (COH) is down 23% in three months.

When Walmart (WMT) and the dollar stores are your retail stars, you know the consumer has issues.

Perhaps the tide will turn once the Fed launches its long-awaited QE3, although that desperate measure is just as likely to result in a markup in the pumps. Or maybe consumers will cheer up after the election when politicians may get around to revoking the austerity measures set to take effect next year.

But, for the moment, consumer discretionary stocks have gone from a source of strength to another hazard zone for investors to avoid. And that’s an ominous change not yet fully priced into the market.

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