Red Friday: Coming to a Mall Near You

It’s become somewhat of an annual tradition. After stuffing one’s self on the fourth Thursday in November, it’s customary to wake up at the same time as newspaper delivery boys and line up for hours just before the official start of the holiday shopping season as retailers extend huge bargains.

As someone who has lived outside of the United States for a big part of my life, I can easily say there is nothing more American than the rampant consumerism following Thanksgiving Day.

It’s Black Friday and retailers celebrate the part of the year when the real profits are made. However, this year Black Friday has all the potential of pushing retailers deeper into the red.

The markets have tanked, credit card lenders have slashed maximum limits, and housing prices continue to set new low after new low. The three great sources of American spending power have all but dried up.

Retailers are expecting to take the brunt of the blow. Most of them have already headed for cover in hopes of surviving.

Starbucks (SBUX) has already closed hundreds of locations.

Circuit City (CC) announced plans to close down 150 of its stores as it teeters on the verge of bankruptcy.

Linens & Things, which has declared bankruptcy, recently hired a realtor to help the company reassign its 371 property leases. The company almost proudly proclaims “GOING OUT OF BUSINESS” on its web site. Everything is on sale.

Retailers are going into survival mode. The vacancy rate at malls across the country proves it. As retailers close up shop, the rate of unfilled store space at malls has increased from 6.3% to 6.6% in the past three months. It’s the highest vacancy rate since the 2001 and it’s still on the rise.

It’s ugly out there in retail, but I’m afraid it’s going to get a lot worse. Sure, the economy is in rough shape, unemployment is rising, almost a third of Americans fear they will lose their jobs, and consumer confidence is the lowest it’s been since it was first tracked, but is going to lead to intense competition amongst retailers.

Let’s take a look at the electronics stores. Best Buy (BBY) is the dominant leader in retail electronics. Normally, it would be a very good sign to see a competitor like Circuit City go through some tough times, since the loss of a significant competitor means more market share for Best Buy. In the short run, however, it’s not very good at all.

Think of the average consumer that’s going shopping for the holiday season. They are already strapped for cash. As we’ve seen, practically no one is buying furniture, cars, or appliances. However, this person might think this is the year that they finally get a new flat panel TV.

Therefore, they start looking for deals - and there are a lot of them. One of the Circuit City stores in his town is going out of business, and since everything must go - at any price, it is offering some steep discounts.

Meanwhile, with the ramp up in foreclosures and almost a million Americans who lost their jobs this year, there’s a glut of used TVs on the market. Whether it’s eBay (EBAY) or Craigslist, there are hundreds available to choose at 60% to 70% under what Best Buy is charging.

Then there’s Wal-Mart (WMT). It can beat anyone’s price on practically anything. Is he/she going to go for the top-of-the-line name-brand model at Best Buy or a similar one at Wal-Mart that’s 30% cheaper?

This is my point - exactly. There are still a lot of options for consumers and those with cash will see some of the best deals in years. Right now, strong companies are looking for market share and weaker ones are looking to survive. In either case, margins will be squeezed, and profits will fall even more.

Retail revenues may only be expected to decline 2% compared to last year, but there’s a lot more to the story here. We’re in for a very competitive holiday shopping season. Consumers with cash will get some great deals and retailers’ profit margins will be some of the lowest we’ve seen in a long time.

That’s why I don’t think the real big crunch has really hit home yet in the retail sector.

We’re at a major economic crossroads. No one knows how much cash hoarding will actually be done or how many of the government stimulus checks will go straight to paying off mortgages or credit cards.

The mighty U.S. consumer may not even be able to find the cash (or credit) to bail out the economy one more time. The National Retail Federation [NRF] asked Congress yesterday for another round of stimulus checks for consumers. Any emergency stimulus package will probably do very little to help. According to a recent NRF survey, 46% of the last round of free money tax rebates went to paying off debts.

Top line sales may be flat or only decline slightly, but profits and margins will be crushed. When your competition is going out of business, price-wise, it’s tough to remain competitive.

Retail stocks are likely to be dead money until all this blows over. Right now, as the economy faces hard times, lots of the stocks look cheap. However, quite a few of the retailers probably won’t even be in business by the time January rolls around, and those that do survive will be badly damaged.

This year it’s going to be a Red Friday for retail, and I still don’t think all the potential downside has been priced into retail stocks.

We at the Prosperity Dispatch continue to recommend sticking with high-quality companies with strong balance sheets and sustainable dividend companies that continue to do well even in the worst of economic times. The majority of retail industry stocks don’t come close to footing that bill.

 Disclosure: None

Comments

[Andy Abraham:]

Great post.. it is clear that Retail is in the dumps because the consumer has no money....thanks

Andy

2008 Oct 31 07:20 AM

[Quickdraw:]

The impact of Circuit City's demise will affect more than just the recently suggested 150 locations. Rumor has it, that Sony is the first of Circuit City's nervous vendors to pull the plug. On Thursday, all Sony trucks destined for CC were told to turn around, and return to Sony with their loads. With such a dominant supplier making that decision, all others will quickly do likewise.

The Red Friday fire sale will be happening at many hundreds of retail shopping areas, all over the U.S. and Canada.

2008 Oct 31 10:03 AM

[phil'spal:]

not every consumer is cash strapped. a lot of them however are in conservation and survival mode, bracing themselves for the possibility of things getting even worse. they're being a lot more careful with their cash than they have been in the past. retailers are going to have to offer more value for fewer dollars to turn shoppers into buyers. given that situation, it's going to be a buyer's market for the holiday season, particularly in the discretionary product. if a retailer isnt willing to offer the deals, he'll be giving up the sales. retailers wont want to be stuck with a lot of inventory and payables in the new year. some may panic. some may slash just to keep the cash flow going. we could be in for some crazy price wars in some retail sectors. stronger players will survive, but the weak sisters who cant afford the profit compression could be shaken out.

2008 Oct 31 10:29 AM

[History stu...:]

I realize that all you folks east of Indiana really think you are the country, and what happens there is reality....for you. You live there, I don't; neither do another 160,000,000 Americans. Some of us haven't even been there. Out west the economy is fairly healthy and even expanding in some states. So all you folks from Apalachia, including N.Y.C., take your Prozack, have a martini, stop whining, and get to work.

2008 Nov 02 12:15 AM

[billddrummer:]

Excellent article.

As a worker in retail and student of the markets, it's true that there are far more shopping options than there were just a few years ago.

Having said that, the stronger retail players will continue to survive, but the landscape has permanently changed. Those companies with good retail locations, well-trained staff, an attractive mix of products and services, and the perception that real value exists when shopping, will combine to make them survivors.

The key to me is innovation. A company must continually evaluate its systems, products, processes, and execution strategies to determine the best way to attract and keep new customers. If it doesn't do that continually, it becomes a casualty of hard times.

I think that BBY fits that defiinition. I recognize that the discretionary retail sector is a place to shy away from now, but after the economy heals itself (which may take years), BBY may become the WMT of the CE industry. Not that there won't be other retailers selling CE products, but that the company will continue to cement customer relationships and market share in one of the most competitive, most challenging retail sectors.

2008 Nov 03 12:03 PM

[Quickdraw:]

To billdrummer

Amen ... as I've said elsewhere, you should be in a good place.

2008 Nov 03 10:58 PM