Dismal Retail Sales Cast Doubt on Recovery

Includes: ANF, LULU
by: Zachary Scheidt

Friday’s dismal retail sales report was largely overlooked as the market continued it’s oversold bounce. But despite the strength in the broad averages, the fundamental data in the report was concerning for both business owners in the retail sector as well as investors who have bid prices of retail stocks significantly higher over the past few quarters.

The big decline cast new doubts about the strength of the economic recovery. Consumer spending accounts for 70 percent of total economic activity. Economists are concerned that households will start trimming outlays as they continued to be battered by high unemployment and a swoon in stock prices. ~AP

Certain retail stocks have already begun to price in a slowdown in retail sales… For instance, Abercrombie & Fitch (NYSE:ANF) has already lost 30% of its market value from its high in April. Still, other expensive apparel companies such as Lululemon Athletica (NASDAQ:LULU) are still trading near their highs and appear to be vulnerable.

The decline in May sales reached 1.2% which was the largest decline since September and the first significant piece of negative news for retailers. I would be more inclined to sell (or short) any rallies in the retail sector. Investors will likely place a lower multiple on these stocks given the uncertainty ahead and the significant risk the that US consumer will continue to pinch pennies and reduce spending.