Average Joe Isn't Buying: Retail's Future Looks Bleak

Attention all retailers: Keep on marking down those DVD players and silk curtains. Average Joe isn’t buying.

In not-so-surprising news, the International Council of Shopping Centers announced that December retail sales dropped 1.7 percent year-over-year, making for the worst decline ever recorded.

Just about every retail chain took it on the chin. Department store fixture Macy’s (M) experienced a 4 percent drop. Electronics giant Best Buy (BBY) saw same-store sales fall 6.5 percent. Apparel chain Abercrombie and Fitch (ANF) saw sales plummet 24 percent.

The outlook for the future looks bleak as well. Some retailers, such as J.Crew (JCG) and bebe stores (BEBE), are discounting spring merchandise before it has even reached the floor.

What does all of this tell us? The consumer has been shell-shocked by the high unemployment rate, depressed housing market, and excessive 401 (k) losses. From here on out, spending will be curtailed. This means that the new Whirlpool (WHR) washing machine can wait. There will be fewer trips made to Ruth’s Chris Steak House (RUTH). There isn’t any rational reason to buy a $180 quilt from Bed, Bath, and Beyond (BBBY).

Any companies involved in specialty retail, luxury brands, or consumer durables should be highly scrutinized at this time. In fact, some of them should be considered strong short candidates.

Disclosure: no positions

Comments

[PastTense:]

"December retail sales dropped 1.7 percent year-over-year, making for the worst decline ever recorded''

1.7% just doesn't seem that catastrophic to me. If business can't handle declines that small, they need new management.

Jan 11 03:23 PM

[TKO:]

Remember that the drop is aggregate - Consumer discretionaries may be very hard hit.

For example;
Consumer staples, which make up most of the retail sales, may have shown a 0.5% decline (for example). Assuming 30% of retail sales are made up of discretionaries, that means consumer staples saw a 0.5% x 70% drop in sales for a weighted drop in sales of 0.35%. Let me put this in perspective - Of the total 1.7% drop, only 0.35% of it is attributable to consumer staples... which make up the bulk of retail sales. So this means the other 30% makes up the other weighted drop of 1.35%. 1.35% = consumer discretionary retail drop x 30% --> Consumer discretionary retail drop = 4.5%.

If your gross profit margins are normally 40% and your net profit margins are 6.5% (Taken from AEO's industry average on Reuters)... doing some reverse engineering, 100M in revenue means 40M in operating profit and 6.5M net profit - or simply, deduct roughly 33.5M from operating profit to arrive at net profit as most of these expenses are fixed (and not tied to cost of goods sold). a 4.5% drop in sales means revenue drops to 95.5M and your gross profit is now 40% x 95.5M = 38.2M. Deduct 33.5M and you now have a net profit of 4.7M instead of 6.5M. A healthy consumer discretionary company suffering a 28% drop in net income is quite harsh. Imagine what company's like ANF are going through with a 24% drop in december year-over-year sales.

The good thing is, however, most of these prominent mid-range to slightly higher-mid range clothing companies such as AEO and ANF are not very highly leveraged -- companies like AEO are actually sitting on a wad of cash. With bankruptcy a very small probability, general economic trends priced in, and an overall very bleak picture that is hard to get any worse, any better than expected results can place significant movement on these stock prices -- There is far more upside than downside.

This is not to say, the news can certainly get worse. But with most of that priced in, it'd be difficult to see significant drops or movements beyond the levels we saw in november. With a technical bottom from panic selling established in the near-term and the worst news priced in fundamentally into consumer discretionaries, both things signal some optimism.

On Jan 11 03:23 PM PastTense wrote:

> "December retail sales dropped 1.7 percent year-over-year, making
> for the worst decline ever recorded''
>
> 1.7% just doesn't seem that catastrophic to me. If business can't
> handle declines that small, they need new management.

Jan 12 01:26 AM

[a. palmer jr.:]

The average joe IS still buying. He's just going to different places now to spend his money. Instead of buying lots of new things like in the past sometimes he buys used items now. Ever go to an auction? People still flock in to buy certain merchandise. I have sold more things on ebay this year than ever. My used items sell for much less than new and work just as good, so why not?

Jan 13 12:48 AM

[LCM:]

For everyone out there focusing on the "numbers", you're focusing on the wrong thing...it's the fear that the "analysts" just don't get!! I worked in high end retail the last 5 years and I saw this coming a year and a half ago. I told everyone i knew "get your money out of the market". Those that listened to me are glad, those that didn't...oh well. As for retail stocks...trust me, there will be NO GOOD NEWS for a long time comin! I've been watching some retail stocks closely and unless they go beyond the lows of last November, I'm not touching them. And as for everyone that thinks the money is just being "redirected" to low end retailers like WM, well thats stupid too.... While most people may turn there for necessities, there is also a lot of needless CRAP that WM sell, that isn't necessity. Why do you think they "disappointed"?

Jan 13 01:54 PM

[aware:]

Good, people should stop spending,they have been over charging us for years.We the people control this country.We can make or break these money hungry companys. We have to just stick to only buying what we need. They will give in,and make whatever it is affordable,or suffer the consequences.

Jan 14 08:46 PM

[User 349251:]

I think all these analysts are missing the real story. I think people quit buying because there's no new gotta have products. Why buy cheap made in China Macy's crap when you can get the same cheap made in China stuff at Walmart?

Feb 02 01:59 PM