The recent news on retail sales on Black Friday, deemed by most analysts to be the most important indicator of the sector for the whole year, advanced by 0.5% versus last year (2008), according to ShopperTrak RCT Corp. Should this be enough to lift the retail stocks?
Black Friday is the day after the U.S. Thanksgiving holiday. This day marks the beginning of the official Christmas holiday for retailers, since the sales really start to pick up and the competition is increasing among the retailers. Traditionally Black Friday has been the day when the retailers' P&L statements for the year go from red (losses) to black (profits).
Huge discounts to laptops and LCD TVs attracted the usual crowds of people trying to get an early bargain. But what is different from the previous years is the fact that the discounts given this year are much higher than in the previous years.
Many analysts are looking at this with optimism. “We’ve seen a gradual retail sales increase over the last two weeks and with Black Friday’s performance, it looks like November will be a positive month for retailers," Bill Martin, a ShopperTrak co-founder, said in the statement. “The 1.6 percent increase we originally predicted for the holiday season remains intact.” But in my opinion, this optimism is a bit exaggerated.
Why? According to my Zacks.com research, retail stocks are 7.51% higher than in the previous year (weighted average). Compared to a 0.5% increase in sales, it means that there will be some disappointment going around which might make the sector share prices drop. This might seem to be simple mathematics indeed. And some might argue that the sales are only 0.5% higher, but in real terms the increase is larger due to the discounts. Yet, I could argue that even if the discounts are on an average of 40% (hardly likely), the 0.5% growth in sales could become 1% - still a large difference from the 7.5% in prices. The retail (discounts and supermarkets) stores are highly dependent on the Christmas sales and the first signs are not looking good...
Disclosure - I have no exposure on retail company stocks or bonds.
