Thursday, April 10, 2008

Retail "Fail" Day-Don't Believe the Hype

Well the market jumped today based on solid earnings from Walmart and Costco. However, the rest of the retail performance was horrendous. Bloomberg had a nice recap on the performance of the retailers for the quarter. Some quotes from Bloomberg on the retail numbers from some of the analysts:

``The economic environment continues to be challenging here, with slowing employment trends, higher energy and food prices and declining values for homes,'' Steven Baumgarten, an analyst at PNC Capital Advisors in Philadelphia, said in an interview. PNC manages $76 billion in assets, including Wal- Mart shares."

``Consumers are growing increasingly wary about their jobs, about the economy and are strictly spending on non- discretionary items,'' Ken Perkins, president of Swampscott, Massachusetts-based Retail Metrics LLC, said in an interview on Bloomberg Radio. "

Some individual store performances for the quarter

Limited Brands posted an 8 percent same-store sales drop, greater than the 7.7 percent decline analysts expected.

Gap, the largest U.S. apparel chain, said sales plunged 18 percent, led by a 27 percent decline at its Old Navy chain. Analysts expected a 7.8 percent drop.

Teen retailer Abercrombie & Fitch Co. said sales retreated 10 percent. American Eagle said same-store revenue dropped 12 percent and cut its first-quarter forecast to as little as 18 cents a share from as much as 27 cents.

Nordstrom Inc. missed analysts' estimates with a 9.1 percent deceleration. Saks Inc. said sales declined 2.9 percent. Analysts expected them to rise by that amount.


My take:

As I write this it looks like stocks are selling off at the close. They should be because these retail numbers are awful. Folks, you do NOT want WalMart and Costco leading the retailers. These places are where people shop when they are squeezed. When you are short on cash you go to Costco and buy a 30 pack of toilet paper to save a few bucks.

Some things that caught my eye from this report. Look at the Gap results! They led the way with a 20% drop. God that's ugly. I am not surprised that a store like this is getting hit the hardest during this recession. This is your typical middle class retailer and their customers were the ones hurt most by the housing crisis.

I also noticed some of the high end retailers missed(Nordstroms, Saks). These retailers usually perform well in recessions because the wealthy have money in a good or bad economies. Maybe some of these high end consumers built a McMansion that they cannot afford?

One of my theories about this business cycle is everyone spent way over their head including the wealthy! In the bubblelands of California and Florida, an average house during the housing bubble went for $600,000-$900,000 in a decent suburb. A nice house for a wealthy family was over $1 million on the low end and went up from there.

That $15,000 monthly mortgage payment will crimp any ones style unless you are Tom Cruise pulling in $25 million a movie. The housing bubble effected every ones judgement at all income levels. People paid for houses that they couldn't afford figuring they could just sell to the next sucker at a big profit if things got a little tight financially.

Well when housing prices couldn't rise anymore and the music stopped, the last ones that bought in 2005/06 were caught holding the bag. These bagholders include people that are stuck in $200,000 homes as well as people stuck in $4 million dollar homes.

As these bagholders struggle to stay afloat by raiding their 401k's to make mortgage payments, expect them to continue buying in bulk at Walmart and Costco so they have the money to make next month's mortgage.

Walmart should thank Wall St. for being so greedy. Its been great for business.

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