A Quick Look at Retail: Target, Wal-Mart, Saks

Here are some retail related stories: Saks posts a loss, Malls retool in order to bring in more customers, and a look at the strategies various retailers are using to help stem the tide of losses.

I think retailers are suffering from the twin challenge of a worsening economy, and consumers that are less able to spend above their means.

The credit issue is of particular importance because consumers were able to use credit to mitigate losses in spending power during the last recession, meaning that in relative terms rising unemployment and economic weakness are affecting retailers more than they have in the recent past. The other problem is that once the economy recovers consumers are still not going to have the same access to credit they did during the credit boom (it may not even be at late 90s levels), so retailers are still going to be dealing with consumers who are spending less even when the economy is healthy again.

The sector's future will be largely dependent on its ability to adjust to the changing consumer spending landscape (both now and in the future), in terms of adjusting product offerings, operations and even marketing messages. Notice how Target (TGT) is starting to advertise based on price, and is beefing up its offerings of food and healthcare products.

While I'm not sure if it would be in Target's best interests (especially over the long-term) to effectively become a grocery store like Wal-Mart (WMT) (nearly 2/3rds of revenue comes from Grocery and Healthcare), I think the company should take advantage of the fact that Rite Aid (RAD) may not survive the year to aggressively expand into Pharmacy. Beauty products is another solid expansion area, as Target's band lends itself way to the sale of cosmetics and other related items.

Talking about Saks (SKS) for a moment, I think the issue they and other luxury retailers are facing is that their core customers have less money to spend, and they no longer enjoy the "poseur effect" caused by faux wealth from the housing boom. While I think they'll have no problems surviving over the long-haul, I think they will have some growing pains as they adjust back down to their core customer base.

On a go-forward basis all retailers will have to adjust both to current conditions, and the fact that their customers won't be as able to spend above their means in the future. This will require a lot of adjustments to the way they do business, as well as general expectations around earnings a profitability. Success won't just be defined by how well a company is able to adapt, but whether or not a particular retailer accepts that the world has changed. Retailers that behave as if consumers will soon be spending like it's 2006 again will be in for a rude awakening.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.