Retailer Earnings Will Continue to Worsen

In the short term, there are definitely indicators that retail could be a difficult place to be in. Even as consumers have cut back an extraordinary amount as their disposable income drops and it is allocated to gasoline and food as these both experience a high level of inflation, we see the possibility of even more cuts in spending. The rebate checks will probably help, but with the rising debt in the United States, many may spend directly on these areas as opposed to going out and buying a new suit. In my estimation some areas of retail could see an initial bump in revenues, but other areas will see little to none of the increased cash.

 

The Wal-Marts (WMT) and Targets (TGT) should see increased traffic as much of what they sell could be considered needs. When things get tight, purchases are held to things that a consumer can not live without. Gasoline and food are definitely needs, and even clothing is, but the type of clothing that is considered a need is what should be considered.

 

The standard family will continue to buy food, maybe purchasing more off brands, but decreases in spending should be negligible. Families will continue to spend on clothes for children as they continue to grow, and many children will still spend their allowance on the new Abercrombie and Fitch (ANF) shorts. For adults, they will cut back. They will pull last year's clothes out of storage and wear those as opposed to buying replacements. When this occurs, many of the stores will decrease their prices to try and bring consumers into their stores. How bad this will be depends on how early the sales are and how steep the price cuts will be.

 

Where I live, I have gone through and checked the retail outlets. What I have found is that many of the stores do not have much for shoppers. The mall is full of teenagers but the parents looking for deals are almost nonexistent. Stores like American Eagle Outfitters (AEO), Abercrombie and Fitch, and Hollister are slow but they still have shoppers and they have yet to initiate sales. When one goes to stores such as Coldwater Creek (CWTR), Macy's (M) and Herbergers, there are not only very few shoppers, but also most of the summer clothes are already on sale. Herbergers already has some of its nicer summer clothes on the 60% off rack, plus most of the others are anywhere from 25% to 40%. At Macy's, it is not as bad, but even its Ralph Lauren lines are seeing sale pricing which is almost unheard of in this area. Basically, everything is on sale, but much of the clothes catering to the middle aged women are on sale, and hardly anything has been purchased off of the rack.

 

Since many have predicted this will let up by the second half of 2008, some money is flowing back into these stocks. I would be very careful speculating on these retailers, just as I would be the automakers. The fundamentals, with respect to non-core inflation, look to add additional stress on the consumer and I believe this will be a reoccurring theme well into next year. A company like Talbot's (TLB) will be hit especially hard. It saw a rebound in its stock after a smaller than expected loss in the fourth quarter. I believe that many on the Street were just ahead of things somewhat as this quarter will be the one to shock to the downside. Either way it will not announce any type of earnings, in my estimate, that will wow and cause a rally.

 

Estimates for Talbot's are still high. Year over year with respect to earnings, analysts see growth of 88%. For the full year, 164% is the estimated growth. I think that the cutback in inventory will help the company's earnings, but a decrease in sales growth by only 2.9% for the quarter and 2.3% for the year still seems high. I believe that revenues could be down more than 5% for the quarter and more than that for the year. The recent cancellation of two lines of credit for Talbot's is also disturbing. If companies like Bank of America won't lend Talbot's money, why would anyone believe it is a sound investment?

Comments

[malach hamo...:]

it is rarely possible to gauge retail activity by personal inspection of a mall or chain of stores. to say that the retailers aren't attracting the parents is to avoid the decent sales at Macy's, certainly not a youth cult store.

what one can see in a mall tour is that some retailers are running lousy stores while others are up to date.

walk into a Sears in any mall and it will be the least attractive main store of any

2008 May 27 07:07 AM

[madmilker:]

well...Michael...I'll tell you what I told Todd...


duh!....Thinking Locally! only if everyone lives in China. The nice people in China have no choice but to support their currency if they shop at a Wal*Mart.

quote***Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. At Wal-Mart, we always work with our suppliers to grow together. In August 2007, Wal-Mart once again secured the top spot of the 2007 Supplier Satisfaction Survey conducted by Business Information of Shanghai. Additionally, Wal-Mart directly exports about US$9 billion from China every year. The export volume by third party suppliers is also estimated to be over US$9 billion.***end quote!

dang! 95%....so! that only leaves 5% for the other 182 country's that make items to sell to the World....including the United States of America.

Todd, you may be long on this company but your a little short on common sense. In order to have a strong currency that currency has to work for the people of that country. Now, the yuan in China works its a!! off by floating around China but with the American people "having to" buy imported items the US dollar gets sent overseas only to be stuck in a foreign bank. The company you praise is the largest in America but it makes nothing and if most all the things that the American consumer buys is outsource to a foreign land it leaves the United States of America holding the bag...cause "we the people" have nothing to sell in order to get all those US dollars back.
Fifty years ago foreigners would had given their left nut for a US dollar or a Hershey chocolate bar and today they have Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico.
Young people of today need to realize that "cheap" is not what the few fat farmers with the penmanship of a poet wrote about in 1776 .....it was the American dream and the word "cheap" will never put the American worker back to making items to sell to the World as long as the American consumer puts that word first.

It's the currency and to have a strong US dollar put it back in America floating from town to town cause the company that has the star in the name and no longer the hyphen above the door does exactly that in China with buying locally and supporting their export and all that so-call "cheap" items that the American consumers "have to" buy is going up in price because the yuan currency is going up in value.
Wake up!....America is $54 trillion in debt....think made in America for a change.

2008 May 27 09:35 AM

[legmaker:]

Madmilker, Im sorry you hate Wal-Mart, dont shop there. You may want to post your rant on a strong dollar etf.

2008 May 30 01:14 AM