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A view - The new normal & impact on Retail over the next 12 months

|Includes: AEO, AMZN, ANF, ARO, BJ, COST, CPB, GIS, JCP, M, WFM, Wal-Mart Stores, Inc. (WMT)
As compared to earlier expectations, the main indices saw a remarkable rally over the last 2 months, fuelled by arguably good third quarter results from a majority of companies across sectors. Now that the DJIA hovers around the 10,400 mark and emerging markets have mostly recovered from the Dubai World impact, the rest of the year and early 2010 does look rosy for the optimists. Especially given the reasonably welcoming statistics on unemployment released last Friday, which saw unemployment dropping to 10% (the first ever drop in the last several quarters i guess) and employers cutting fewer jobs than in prior months.

I do personally believe and agree to the fact that a recovery is very well underway - but still stick to the view point that we are going to continue to see a new normal with lower consumer spending, greater savings & investments and a more tempered retail and construction growth. WIth unemployment still set to stay above 9% at least for the next 12 months & the impact that the down turn has had on consumer psyche, i will bet on a few trends continuing to hold momentum [as compared to averages over the 5 years pre-recession]. Just to highlight a few which outline the line o:
  • A higher proportion will continue to shop for perishables and consumer durables from lower-prices department chains (read Walmart, Costco, BJ, Aldi etc). But niche health-oriented stores like Whole Foods should continue to draw new customers though.
  • Given the significant price differentials, online retailers like Amazon and to a lower extent ebay will continue to build their consumer base across segments - but, especially on consumer electronics and even some high-value retail items like perfumes!
  • In the broadline retail segment, low-price should still continue to draw customers - JC Penney should hold ground against a Macys for example
  • Though the teen segment still has some strength in higher-priced apparel, i still would bet on an Aeropostale (P/E of below-10!) as against Abercrombie & Fitch or American Eagle for example
  • On the Food sector, food-at-home players like General Mills, Campbell should see increased growth (globally in this case) as compared to restaurant chains.

Having said that, there still is enough steam in the very high end to perk up valuations further - Tiffany's, Saks for example. It's the higher-priced mass-market retailers that should underperform if a new normal is indeed the reality. With the same view, housing prices in the low-to-mid and extremely high end should see a higher uptick over the next year as against the upper middle segment - the incentive expiring by April 2010 will create a big 'non-seasonal' fluctuation in buying staistics though.

On a more-macro angle, discretion is probably the better option. Like Dubai World was an eye opener to bulls in the high-yield/high-risk bond market, there are probably several skeletons to come out in many sectors, especially commercial real estate for example. To sum up, it's still better to bet on price-value plays and fundamentals as against exuberant growth in higher-end sectors which rely on a rapid uptick in consumer spending.


Disclosure: Long ARO, will be long WMT!